Social Security

Does the nation's oldest, most successful social program need a complete overhaul--or just an infusion of money?

How to tell the difference between Al ("We're for the people") Gore and George W. ("I trust the people") Bush? Take a look at what each candidate says at this week's debate about how to "save" Social Security. You have probably heard that the popular program will go bankrupt soon, but that's not exactly true. The real problem is that as the baby boomers retire and then live longer than previous cohorts, aid to the elderly will take up more of the budget, leaving little room for other priorities like health care or education. The solution we choose will have an impact on generations to come, and not just the retired and disabled.

Gore promises that when you retire, the government will take care of you: Social Security, he says, must continue to be "a compact between generations" in which today's workers pay for better lives for today's retirees. Bush says you can and should take care of yourself. He wants to transform the system into a long-term personal investment plan: you put in money now and take it out when you retire. What do you think?

--By Andrew Goldstein

THE BUSH PLAN

Letting people invest their own money, says Bush, will produce better long-term returns than keeping all Social Security revenues in the hands of the government. So he uses about half the Social Security surplus--roughly $1 trillion--to give young workers the right to divert some of their payroll taxes to private savings accounts. Workers could then invest this money in stocks and bonds.

What It Solves

Assuming Bush substantially cuts the guaranteed benefits paid by the government each year to retirees (he has so far avoided actually saying he would do this), he can reduce the long-term cost of the program. And if the stock market continues its historical rate of return of 7% a year (or even if it gains a more modest 4% a year), such cuts would be painless because most beneficiaries would retire with more money than they would otherwise receive under the current system. Giving workers private accounts should also help boost the dismal national savings rate.

Where It's Weak

--IT'S A GAMBLE If stocks do not continue to rise (a very real possibility, considering how high current stock prices are relative to company earnings), workers would be stuck with lower benefits. If large numbers of retirees lost money in the market, there would be pressure on the government to bail them out, forcing a future Administration to choose between precipitating a fiscal crisis and ignoring the struggling elderly. Even if the market stays strong, some people are bound to retire and cash out their holdings in a bear market (historically, nearly 1 out of every 4 years has shown negative stock returns). This could force some people to delay their retirement until stock prices improve. And regardless of how the market performs, the price of establishing and operating more than 150 million private investment accounts could be huge. One study shows administrative costs could eat up more than 20% of invested money.

--THE TRILLION-DOLLAR HOLE By allowing workers to divert part of their payroll taxes to private accounts (Bush hasn't said how much this would be; the fraction his advisers throw around is one-sixth), Bush cuts the size of the Social Security surplus almost in half, reducing it about $1 trillion. And not using that money for debt reduction adds an additional $300 billion to the government's interest bill. These costs (along with his $1.6 trillion tax cut) mean it will take longer for Bush to eliminate the national debt, leaving less money in the future to guarantee Social Security's solvency.

--WHERE'S THE COMPASSION? Most bipartisan groups that have recommended moving toward private accounts also call for a minimum guaranteed benefit to ensure that more seniors do not fall into poverty. Bush vows to preserve the existing safety net for survivors and disabled workers, but so far, he does not guarantee a high enough safety net for poorer workers or for those who do not fare well in the stock market.

THE GORE PLAN

Social Security's basic guarantees must not change, says Gore. So he proposes pouring more revenue into the program in order to fund the retirement of the baby boomers without having to raise payroll taxes or cut benefits. Since the Social Security system cannot keep big cash reserves of its own, Gore relies on a two-step process. He uses $3.5 trillion of the projected surpluses over the next 12 years to pay down the entire national debt; then he takes the resulting savings in interest payments (which by 2015 will amount to more than $220 billion a year) and funnels them into Social Security.

Gore also proposes what he calls "retirement savings plus," a plan for voluntary, tax-free savings accounts similar to 401(k)s that can be used to supplement Social Security. Workers who earn as much as $100,000 a year will receive federal matching funds (in the form of tax credits) of as much as $1,500 a year.

What It Solves

Paying off the debt now enhances the Treasury's ability to borrow later, when Social Security benefit payments will exceed incoming payroll-tax revenues. A smaller national debt also reduces overall demand for credit, pushing down interest rates. This in turn should stimulate economic growth and create jobs, producing more payroll-tax revenue to keep Social Security healthy. Devoting the savings in interest payments to Social Security should extend the program's solvency from 2037 to 2054.

The "retirement savings plus" accounts should spur much needed saving. And if poorer workers take full advantage of the tax credits, they could wind up with a $200,000 nest egg at retirement.

Where It's Weak

--THE READ-MY-LIPS PROBLEM By promising never to raise the retirement age, cut benefits or raise payroll taxes, Gore banks on the surpluses created by the good economy to pay for the baby boomers' retirement. If the economy goes into recession, Gore will have a painful choice: go back on his word, or take money from the rest of the budget to pay for Social Security (which could mean raising income taxes, cutting spending in such programs as education and health care or running up annual deficits).

THE CHECK IS IN THE MAIL The Gore plan only delays the impending bankruptcy of the program; it doesn't solve it. Even if Gore gets the country through the retirement of the baby boomers, the cost of Social Security will continue to rise (because people are living longer), forcing what may be more painful reforms the next time around.

THE REVENUE RAID Transferring interest savings to Social Security doesn't change the basic equation: more and more government revenues will still need to be devoted to the retirement of the elderly. Gore increases the percentage of the budget devoted to retirement with his "retirement savings plus" plan (which will cost between $200 billion and $620 billion over the next 10 years). Is it worth annually spending nearly a third of the national budget on Social Security to extend the program's life for only 17 years?

A Chance for Compromise

A move toward privatization does not have to be all or nothing. In recent years leading thinkers from both parties have proposed a combination of the Bush and Gore plans: establish a high guaranteed minimum-benefit level that keeps seniors from falling into poverty, gradually raise the retirement age to 70 (which could cut the program's projected deficit by two-thirds) and allow workers to invest a sixth of their payroll taxes, as well as additional voluntary contributions (possibly matched by government dollars), in low-risk stock or bond funds. Such a plan, says Donald Marron, CEO of Paine Webber and chairman of the bipartisan National Commission on Retirement Policy, "doesn't break the budget, lifts more elderly out of poverty and makes everyone an owner of the American economy."