Fate of Social Security in sharp dispute

Consensus proves elusive

Republicans say Democrats want to apply Band-Aids to a lethal wound while Democrats say Republicans want to perform brain surgery for a headache.

The ailment they're talking about is the draining of Social Security funds - an issue that both parties agree needs to be changed. But they sharply disagree on the extent of the needed remedy to save the 70-year-old government program that guarantees retirement benefits for workers.

But besides a monthly check your grandparent receives and a deduction line on your paycheck, what is Social Security?

There's one thing it's not, said AU economics professor Tom Husted.

"It currently doesn't function as a pension plan where workers pay into a pot and when they retire they get that pot," he said. "It's truly a government plan where current workers pay for current retirees."

In 2005, nearly 48 million Americans will receive approximately $509 billion in Social Security benefits, according to the Social Security Administration's Web site.

Social Security is unlike any other government program in that there is a specific tax - the Federal Insurance Contributions Act tax - funding it. Employer and employee each contribute 6.2 percent of wages earned at each pay period, Husted said.

That money goes to current retirees, and any surplus is used to buy government bonds to earn interest, pay off the federal deficit and improve the government's credit rating, he said.

In a system designed to protect poor retirees, lower-income people get more of their money back as a percentage than higher-income people.

The program accomplished what it was designed to do when introduced in 1935 as part of President Franklin Delano Roosevelt's New Deal: protect retirees who lost their entire savings in the Great Depression.

But the problem lies in the fact that while there are currently 3.3 workers for each beneficiary, by 2031, there will be 2.1 workers for each beneficiary, according to the administration's Web site. Baby boomers are retiring in large numbers and people are living longer due to advances in health care.

Within the next 15 years, many agree that the system will take in less money than it gives out, resulting in a serious decline of return.

Solutions to Social Security

If the program doesn't undergo a drastic overhaul, workers will not see 100 percent of their benefits, said Berna Brannon, Social Security analyst at the Cato Institute, a Libertarian think tank.

President George W. Bush is expected to reveal his long-term plan for fixing Social Security in his State of the Union address on Wednesday. While he has provided few details, it is widely believed he will advocate partially privatizing the program and creating individual accounts for each worker.

"The theory is that because the stock market has historically performed better than the bond market ... people would make all this extra money and get a better return," Husted said.

Wall Street has not been quick to embrace this idea, however. Because investors would invest for the long-term, brokerage companies would see little revenue from transaction fees.

Brannon said she is in favor of privatization because the risk of giving the money to the market is lower than the political risk of leaving it in the hands of the 535 politicians in Congress.

"Privatization means facing up to the problem," she said. "It means we're putting this house in order."

Some members of Congress have said individual accounts are a possibility but that other options should be explored first.

"The president's leadership is essential to bring members of Congress of both political parties together," said Rep. Bill Thomas (R-Calif.) in a Jan. 26 editorial in The Hill. "Meanwhile, it is incumbent on members to offer their own policy ideas and engage in a broader discussion of retirement security, including how to strengthen Social Security."

The Problems

Thomas appeared on "Meet the Press" on Jan. 23 and offered a consumption tax and national sales tax as alternatives to individual accounts.

Husted said the money from these taxes would have a hard time making it to beneficiaries' wallets. He said he favors the system in which a single tax is solely dedicated to Social Security.

Social Security is a legacy of the Democrats, Brannon said, and they'll be wary of any proposed changes. Democrats say Bush is planning to systematically "dismantle" Social Security and his plan will significantly cut benefits for future retirees, according to the Democratic National Committee's Web site.

By speaking out against privatization, Brannon said Thomas is trying to broaden the debate and bring Democrats into it.

By raising the total employee/employer contribution from 12.4 percent to 16 percent, the problem would disappear, Husted said. However, no politician wants to be responsible for a tax hike, he added.

"Republicans don't like to raise taxes, period," he said. "Democrats don't like to raise the payroll tax because it's only on wages, it's not on stock transactions, it's truly not a death tax and it's not on estates. You've got the perfect storm. You've got Republicans who don't want to raise taxes - or at least claim they don't want to raise them - and you've got Democrats who don't want to raise that tax."

Privatization is not a fix-all either, Husted said. If it were enacted there would be transitional costs of up to $3 trillion because funneling money away from current workers into individual accounts would create a gap, he said.

To pay this amount now would be saving money in the long run, Brannon said. "We need to act now to be fiscally responsible."

The money to bridge this transitional gap would come from raising taxes, cutting spending or programs and adding to the national debt, she said.

Whatever happens, it needs to happen now, warned Thomas.

"The sooner the problem is addressed, the smaller and less severe the changes will be," he said in The Hill. "Doing nothing has real consequences for the future."

The Future

The most important piece of advice Husted offered to current college students planning now for retirement in 45 years is to "save, plain and simple."

"When you start a job, get into the firm's pension system, save as much as you can there and save more," he said.

Michael Coon, a senior economics major in the College of Arts and Sciences, said he hasn't made any retirement preparations because he's still in school. However, he said he is against the privatization of Social Security because it would eliminate the inherent "security" of the program.

"The current program may not yield the greatest returns on investment," he said. "But then again it's not supposed to. It's supposed to be secure."

Brannon said Bush might have a difficult time selling his plan to the American people. He needs to ease seniors' fears that their benefits will not be cut and emphasize the better rate of return of individual accounts for current college students when they retire. A $40 million TV ad blitz will begin next week in an attempt to accomplish just that.

Regardless of what Washington decides, Husted warned college-aged students not to rely on Social Security as their only source of income.

"You have to count on your own resources," he said. "Say 'I'm putting that money in and I'm not going to touch it for 50 years.'"

Coon agreed that Social Security is not a retirement account.

"You won't be able to move to the islands with your Social Security check when you turn 65," he said. "You're not supposed to"

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