That, in a nutshell, is the challenge faced by President Bush as he opened Phase 2 of his drive to transform the 70-year-old federal retirement-and-insurance program. In his State of the Union speech Feb. 2, Bush acknowledged that "fixing Social Security permanently will require an open, candid review of the options." Bush also promised to "work with members of Congress to find the most effective combination of reforms." (See BW Online, 2/3/05, "The State of Social Security.")
1950 CUTOFF. Translation: Private accounts won't do anything to fix the system's long-term 75-year financing shortfall -- $3.7 trillion -- which will have to be addressed instead by cuts in traditional benefits. Adding personal accounts by allowing younger workers to divert up to 4% of their 12.4% Social Security payroll tax into personal accounts will only add to the program's shortfall (see BW Online, 2/3/05, "The Fog of the Budget".)
But score one for the older folks: After promising for months that no one "at or near retirement" would be affected by the White House proposal, the Administration defined this hands-off group as those born before 1950. Hence, today's 55-year-olds would not be invited to join the uncertain world of personal Social Security accounts. Nor, presumably, would the Administration support a cut in their benefits as part of an overall system fix.
In addition, Administration officials made these points on the new plan:
Although politicians of both parties have suggested a range of tax measures to help close the financing gap, the White House won't support anything that could be defined as a tax increase. So the gap must be closed by benefit cuts or borrowing -- but not, say, by raising the current cap of $90,000 on wages subject to the Social Security payroll tax.
The word "bankruptcy" is substituted for "crisis." Democrats have insisted there's no crisis, and polls show the public accepting that any crisis is years, perhaps even decades, away. But experts and the public are agreed that without changes, Social Security will eventually go broke.
Bush is modeling his private accounts after the Thrift Savings Plan (TSP) enjoyed by federal employees -- basically a 401(k) plan that allows workers to channel their investments into five different investment plans monitored by the federal government and walled off from rapacious Wall Street stockbrokers and their high fees. Investments are made in baskets of small- or large-cap stocks, in international stocks, corporate bonds, or U.S. Treasury securities. A sixth "life cycle fund" will be added to allow age-adjusted investments in stocks and bonds. The administrative expense of such funds should match the low 0.30% fees of the federal TSP.
Workers younger than 55 would be allowed to opt into the private accounts. But when it comes time to cash out their private accounts, they could be forced to put the money in an annuity rather than take it to the track. The federal government would try to ensure that bad investment choices would not cause Social Security recipients to fall below the poverty line.
One incentive to opt into the private account system -- the ability to leave some of the money to heirs -- would be available only if the return to the private accounts exceeded the 2% annual return of Social Security's regular program. Otherwise, lower-income beneficiaries might be required to buy an annuity, which pays out a guaranteed monthly benefit but only until the retiree dies.
Workers would be able to divert 4% of the 12.4% payroll tax, but only up to $1,000 for the first year and perhaps some period beyond. Nevertheless, the White House expects that two-thirds of younger workers will eventually opt for personal accounts.
Workers who opt in to the private accounts won't be allowed to switch back if the market goes south. Instead, they can approximate Social Security's traditional rate of return by investing in the U.S. Treasuries fund. The concept: Currently, Social Security payroll taxes are collected by the government and spent on benefits. Any surplus is spent on other needs, with the Treasury Dept. placing an IOU in the Social Security "trust fund" and promising to pay the same rate of interest earned by Treasury securities.
Private accounts won't receive a preferential tax treatment like, say, Roth IRAs, whose investment proceeds aren't taxed.
After the State of the Union speech, Bush is heading out on a two-day, five-state tour along with several Cabinet members to promote his Social Security proposals. Suffice it to say: A cakewalk is not expected. Magnusson is a correspondent in BusinessWeek's Washington bureau