Values-More Than Dollars-Clash in Social Security Debate
Rosenblatt, Robert A., Aging Today
"I love the idea of people being able to own something," President Bush said, talking about his plan to allow Americans to carve out personal accounts from their Social security payroll taxes. Don't mess with Social security, is the response from his critics, such as AARP, which has launched an advertising campaign to oppose private accounts.
"It is the most successful retirement security and antipoverty program we have created," said Roger Hickey of the Campaign for America's Future, announcing a coalition including the AFL-CIO, NAACP and the National Organization for Women, which gathered to fight privatization plans by the President. Forget about the figures of trillions of dollars, the word insolvency and the phrase investment return that people on both sides of the hottest domestic political issue of the year will be throwing at each other in the coming months. This debate is not about numbers-it is a clash of beliefs and values.
Two basic, opposing philosophies are considering ways of dealing with the solvency of Social security when the boomers retire. If nothing is done, the trust fund (the surplus exceeding the amount currently being paid to retirees), which now contains special issues of U.S. Treasury securities, will start to be depletecHn 2018. After that, Social security will be able to pay full benefits until the fund is exhausted in 2042, according to the most recent report from the program trustees. After 2042, Social Security will be able to pay only 72% of promised benefits under current law.
The solvency philosophy argues that Social Security is a sound system and needs only minor modifications to continue in its role of providing retirement, disability and survivors' payments. Advocates of the solvency solution would choose among raising revenues for the system or reducing benefits, or a combination of both.
The other philosophy, dubbed privatization, would gradually convert Social Security into a prefunded system, similar to pension plans and 401(k) programs in private industry. Each worker would have a personal account, with future retirement financed by money he or she contributed today. Eventually, personal accounts would provide the bulk of an individual's retirement income. Social Security would provide a reduced benefit. Here is a guide to key plans now floating around Washington:
Peter A. Diamond of the Massachusetts Institute of Technology, Boston, and Peter Orszag, Brookings Institution, Washington, D.C., are coauthors of Saving Social Security: A Balanced Approach (Brookings, 2004).
According to their approach, life expectancy is steadily increasing. Social Security benefits and taxes should be adjusted to account for the longer time people will be collecting benefits. They propose an adjustment, half through reducing benefits, and half through increasing payroll taxes, to provide for the cost of the benefits people will collect through increased longevity. They would increase the maximum wage base subject to payroll taxes-$90,000 in 2005-to cover 87% of taxable income, up from the current level of 83%. (The 1983 Greenspan Commission calculated that taxing 90% of U.S. wages would keep Social Security solvent, but rapid growth of earnings by higher-income earners since 1983 left more income untaxed than anticipated.)
Diamond and Orszag would reduce retirement benefits for the highest earners, who make up about 15% of the U.S. workforce. Also, they propose mandatory enrollment of all newly hired state and local government workers in Social Security.
This plan would add a new tax in recognition of the fact that previous generations received benefits larger than their Social Security payroll tax contributions. Future generations will have proportionately smaller benefits as the system is adjusted to pay this so-called legacy debt. For high earners, there would be a new 3% tax on earnings above the Social Security maximum wage base, with a gradual increase to 3. …