Since President George W. Bush delivered his State of the Union address on February 2, 2005, in which he formally introduced his proposal to incorporate personal/private accounts into the Social Security program--one's terminology varies depending on their political perspective and support for or opposition to the plan--the issue of reforming the Social Security system has been hotly debated by political leaders, pundits, and citizens alike. Regardless of one's views toward the plan, individuals on either side of the debate have yet to question how the president's proposal would alter the financing scheme currently used to fund the Social Security program. At present, 6.2 percent of workers' salaries are invested in the Social Security trust fund. Employers match this contribution for each of their employees. Those who are self-employed pay the entire 12.4 percent themselves. Under the president's proposal, individuals would be allowed to invest up to four percent of their payroll tax contribution to Social Security in individual accounts rather than having those funds deposited into the federal government's trust fund. Upon retirement, individuals would live off a reduced Social Security benefit plus the income from their investments rather than from the traditional stipend provided by the Social Security Administration. The remaining 2.2 percent of each worker's salary would continue to go into the government's Social Security trust fund to cover payments to existing beneficiaries.
One of the primary advantages of his plan that the president touts is the fact that individual accounts offer the opportunity to receive higher yields on one's investment than are currently available through Social Security. Additionally, benefits can be passed to loved ones through inheritance after one's death. Opponents express concern that the president's proposal would divert money out of Social Security, thereby weakening the system overall, and that it would fundamentally alter the nature of Social Security as a "safety net" program designed to keep the elderly out of poverty.
That President Bush's proposal has caused intense debate since its formal introduction should come as no surprise given the central role that Social Security has come to play in American life since its creation in 1935. (1) Coverage is nearly universal, with approximately ninety-five percent of older Americans either currently receiving or are eligible to receive benefits upon their retirement. For two-thirds of the elderly, Social Security makes up the largest portion of their monthly income, and for nearly one-fifth, it is their only source of income) Equally important, Social Security benefits are not limited to seniors. They are also extended to the survivors of deceased workers, including parents, children, spouses, former spouses who have not remarried, and to disabled workers, their spouses, and their children. (3) In addition, since 1965 the program also provides health care coverage through Medicare. (4)
Although the issue of personalizing/privatizing Social Security has taken center stage at present, the reality is that reforming the program in some way is hardly a new idea. Reforms have been debated regularly since 1982, when the Social Security trust fund was forced to borrow nearly $600 million in order to pay required benefits on time? Proposals for reforming Social Security were central features of both major party candidates' campaigns in the 2000 and 2004 presidential elections. (6) During both of his campaigns, President Bush promoted the program currently being debated--establishing individual accounts which would supplement reduced government benefits. (7) Both Democratic candidates, Vice President AI Gore in 2000 and Senator John Kerry in 2004, proposed significantly different alternatives for saving the system. Gore proposed financing the program's coming shortfall by tapping into the government's general or non-Social Security tax revenues. He also promoted a "Retirement Savings Plus" program--a retirement fund in addition to the traditional Social Security stipend that would be financed through government contributions to individual retirement accounts in varying amounts depending on the individual's income and rate of savings in the program. (8) In last year's presidential campaign, Kerry focused his Social Security reform efforts on more modest goals, including plans to cut the size of the overall deficit, thereby reducing the likelihood that Social Security trust fund proceeds would be used to balance the federal budget. In addition, he indicated support for capping Social Security payments for those earning over $200,000 annually. (9)
Why have the nation's leaders been debating for more than twenty years how to repair the program without reaching any consensus? In part, the answer lies in the very extensiveness of the program--the number of benefit recipients and the program's impact on the economy. It is a challenging program for politicians to alter because as a retirement program, any changes that are made to it can have dramatic effects on the lives of older Americans in their retirement years. As an influence on the national economy it is equally significant, adding nearly $500 billion to the nation's coffers in 2000. (10) Politicians have long recognized the political risks of tampering with such a popular and extensive program; Social Security has commonly been referred to as "the third rail" of American politics--touch it and you die!
Now that problems in the system are recognized and potential solutions are being debated, the complexity of the program has led to a discussion of a variety of reform options. Reform proposals introduced in recent years have included, in addition to establishing individual accounts, each of the following suggestions: increasing the retirement age; reducing benefit levels; increasing the maximum amount of earnings that are taxable under Social Security; and, increasing the Social Security tax rate."
The current focus on the establishment of individual accounts raises a number of interesting issues for debate. Perhaps foremost is the fundamental issue of whether or not significant reform is necessary at this time--is there in fact a "crisis" in Social Security or not? Another interesting point for discussion is the role that political ideology plays in President Bush's decision to pursue this particular course of reform as opposed to other options that have been debated over the years. Is his proposal to establish individual accounts within Social Security a reflection of a national consensus to reduce the role of government in individuals' lives, or do Americans continue to be supportive of the governmental provision of safety nets? A number of economic questions also come into play regarding this reform proposal. Are government- or independently-managed savings plans likely to produce the largest nest eggs for retirees? In this regard, comparisons to similar programs adopted in other countries present some interesting results that may be relevant for policy makers in the United States. (12) If this plan is implemented, how much will it cost? How will those costs be financed? How will current benefit recipients be impacted, if at all, by the diversion of Social Security taxes into private accounts? This point-counterpoint addresses these issues relative to current efforts to reform Social Security.
(1) Paul Light, Still Artful Work: The Continuing Politics of Social Security Reform, 2nd ed. (New York: McGraw Hill, Inc., 1995), 32.
(2) Dean Baker and Mark Weisbrot, Social Security: The Phony Crisis (Chicago: University of Chicago Press, 1999), 12.
(3) Peter Diamond and Peter Orszag, Saving Social Security: A Balanced Approach (Washington, D.C.: Brookings Institute Press, 2004), 15.
(4) Allen Smith, The Looting of Social Security: How the Government is Draining America's Retirement Account (New York: Carroll & Graf Publishers, 2004), 29-30. It is worth noting that retirement/survivors benefits, disability benefits, and Medicare benefits are financed through three separate accounts.
(5) Light, Still Artful Work, 31.
(6) Henry Aaron and Robert Reischauer, Countdown to Reform: The Great Social Security Debate (New York: The Century Foundation Press, 2001), 4.
(7) Ibid., 163.
(8) Ibid., 164.
(9) Ramesh Ponnuru, "The Kerry Comeback" National Review, October 2004, 30-31.
(10) Aaron and Reischauer, Countdown to Reform, 4.
(11) Ibid., 134-35.
(12) Larry Rother, "Chile's Retirees Find Shortfall in Private Plan" New York Times, January 27, 2005, A1.
CLAUDIA BRYANT is an Assistant Professor in the Department of Political Science and Public Affairs at West Carolina University in Cullowhee, NC. JASON BURELL and PETER DELEA are both graduate students in the Master's Program of Public Affairs at Western Carolina University.…