Social Security Reform

Should Social Security be reformed? If so, how? Is there a Social Security crisis at all?

Michael Tanner, director of Health and Welfare Studies at the Cato Institute, discussed Social Security reform.

The transcript follows.

Editor's Note: Washingtonpost.com moderators retain editorial control over Live Online discussions and choose the most relevant questions for guests and hosts; guests and hosts can decline to answer questions.

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Morristown, N.J.: Where do you stand on the argument that Social Security is actually solvent, and will remain so, but that Medicare cost will actually spiral?

That the Administration wants to fix the wrong thing, something that isn't broken, for ideological reasons?

Michael Tanner: While there is no doubt that Medicare is in even worse shape than Social Security, that does not deminish Social Security's problems. Social Security will begin running a deficit in less than 15 years. The IOUs in the Social Security Trust Fund are not real assets--but merely obligations against future taxes. Overall, Social Security faces unfunded liabilities of $11.4 trillion, plus $1.5 trillion to redeem the Trust Fund.

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Albany, N.Y.: Privitization proponents point out that the stock market has a historic return of about 7 percent. However, much of that is due to the Dow Jones increasing elevenfold between 1982 and 2000, something which has never happened before, and will probably never happen again. Even during the post World War I boom, the Dow Jones did not even quadruple. If this massive 1982-2000 anomaly is factored out, what is the historic return and how would that compare with Social Security as currently structured?

Michael Tanner: The Social Security Admimistration estimates that the returns to equities in the future will be about 6.5% (real), slightly less than the historic average--in part for reasons you cite. This compares to future returns of less than 1% from Social Security for most young workers.

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Raleigh, N.C.: If private accounts are such a wonderful thing, why not have a national mandatory 401k plan (like the president is proposing to replace social security with) in addition to social security? Then if we lift the cap on taxable income for social security and slightly raise payroll taxes we could still have a guaranteed benefit PLUS the ownership and savings society that the president professes to want.

Why is the destruction of social security so important to you?

Michael Tanner: The problem with so-called "add on" accounts is that wealthy people already save, but poor people lack the discretionary income with which to do so. If add-ons were voluntary, poor people would not participate, so we would just be creating another savings vehicle for the waelthy. If it were mandatory, it wuld be the same as a tax increase, falling on those who could least afford it. The presiden'ts plan would let poor and middle-income people save from the same money they are already paying for retirement.

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Atlanta, Ga.: Do you think the government really reduces it's long-term liabilities with privatization? That is, do you think our society can resist making retirees "whole" if their investments go bust?

Michael Tanner: Every plan for individual accounts includes some level of safety net to ensure that no senior will be left destitute if their investments go poorly. However, the cost of these safety nets are estimated to be far lower than Social security's costs. In addition, remember that all the plans envision very conservative, broadly diversified investments. No one will be able to go out and invest in their brother-in-law's South American gold mining stock. Given the long-time investment horizons we are talking about (30-40 years), investing is remarkably safe.

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Washington, D.C.: What happens to people who have disabilities, or are widowed, or orphaned if Social Security is changed? Currently, many of those individuals receive payments from Social Security. Moreover, Social Security is insurance to help Americans have some safety net. It is not supposed to be an investment program.

Michael Tanner: All the plans being discussed by the President and Congress would leave survivors and disability benefits unchanged. In addition, funds in individual accounts would be fully inheritable, providing extra benefits for widows and orphans.

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Houston, Tex.: For more than 40 years, I have contributed to Social Security. Within 10 years, I will be eligible to retire. However, the new plan pushes that retirement back until I am 70, another 8 years.

Frankly, I believe this is unfair. What options are available to persons who oppose privatization of Social Security?

Michael Tanner: Rest easy. No plan currently being considered by Congress or the President raises the retirement age.

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Raleigh, N.C.: The President identifies 'young workers' as the group to benefit from private accounts. Has anyone identified this precise age group?

Most people I speak with about private accounts automatically assume they will be available to everyone.

Michael Tanner:
T plans being discussed by Congress would keep workers age 55 and over in the current Social Security system, but give younger workers the option of choosing individual accounts.

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Baltimore, Md.: You indicated the President's plan would give workers under 55 the "option" to invest in private accounts. What exactly is the other option?

Michael Tanner: The other option would be to remain in the current system, agreeing to accept the level of benefits that Social Security can actually pay with the revenue it receives.

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San Francisco, Calif.: Prior to the creation of Social Security, it was commonplace for elderly Americans to be homeless, or forced to live in sub-standard "poor houses" and taken advantage of by inscrupulous landlords; hunger among this population was rampant, and health needs were only met for those few who could afford it.

Further, we've seen in recent years that Wall Street will stop at nothing to separate vulnerable investors from their hard-earned money -- essentially, there is an almost complete absence of ethics among the "privatization" community, which is no surprise given the profit-driven culture on the Street.

Perhaps, Michael, you could explain how it is "moral" to extol the virtues of an idea that has already proven to be immoral, at a time when no crisis extists? Why is this anything more than an effort by Wall Street heavies to rob America's most vulnerable citizens blind?

Michael Tanner: What is moral about taxing younger workers at ever higher rates, while promising them benefits that cannot be paid, under a system in which they have no legal, contractual or property right to benefits.

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Des Moines, Iowa: The President's plan--to the extent it has been publicly defined--is built on the assumption that each of us has a Social Security account, and that we are guaranteed to get back all we put in, plus interest. That was never the intent of the program; the original intent was to serve as an insurance program. As we know, insurnace is based on some people getting back more than they put in, and most others not getting it all back. Why doesn't the administration work to correct that false impression?

Michael Tanner: Its a very bad insurance plan indeed. Imagine an insurance plan that has already increased your premiums by 800% while reducing its benefits, which says you have no legal right to benefits at all, and which cannot pay you its promised benefits in the future. Would you choose such a policy? Why not give Americans the choice.

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Philadelphia, Pa.: Fair enough. If an "add-on" approach excludes poor people, who can only be expected to save, voluntarily, by a reduction or re-allocation of the current payroll tax, how about flipping the funding model for Social Security. Cut the percentage on the payroll tax in half (or some percentage), encourage the middle and lower class to dedicate the difference to new univeral 401K, and eliminate the income ceiling for the payroll tax. Eliminating the ceiling allows us to continue to have anti-poverty insurance -- for retirees, widows, widowers, etc, encourages savings and ownership, and spreads out participation.

Michael Tanner: Eliminating the cap on Social Security taxes would be the largest tax increase in American history. But it would do surprisingly little for Social Security's solvency. Removing the cap completely would gain only 6 years of cash-flow solvency.

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Minneapolis, Minn.: Isn't it true that Wall Street stands to make billions from fees charged to these private accounts?

Michael Tanner: Do we care if Wall street makes money as long as workers also receive more than they would from an unreformed Social Security system. I have no great love for WAll Street, but what I really care about is creating a system that gives workers ownership and control over their retirement funds, allows middle and low-income workers to build real inheritable wealth, qand provides higher returns and benefits. Besides, Wall Street would probablr get far less than suggested. The Social Security Administration estimates that the cost of administering these accounts would be only about 3/10 of a percent of the assets managed.

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Bowie, Md.: Since 1983, workers have been paying an amount into Social Security that is over and beyond what is necessary to fund current benefits. This money was supposed to be invested for the baby boom generation to meet social security obligations to them. Over the years the government has spent that money on other federal obligations, and Bush even used it to fund tax reductions for the rich. Now, everybody is saying the system is in crises and will go bankrupt. This did not just come about in the last year. If government officials knew the system was in such bad shape, why the huge tax cuts primarily for the wealthy? Frankly I resent paying more than needed into the Social Security system, to now be told that my contributions were used for other purposes.

Michael Tanner: It was indeed a mistake to ask workers to pay into the system more than was required to pay benefits--because the government is structurally incapable of saving money (regardless of which party is in power). The surplus funds have to go somewhere--they can't be buried in a cigar box behind the Treasury building. We don't want the government to be purchasing real assets with the money, and thereby becoming the largest ownner of American business. Therefore, they purchase Treasury bonds. The income from purchasing the bonds becomes General Revenue of the federal government and is spent on whatever the federal government does--building roads and bridges, the War in Iraq, building the Cow Girl Hall of Fame. What remains behind are the bonds, essentially IOUs promising to tax someone in the future in order to pay benefits.

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Wilmington, N.C.: Your reference to "The IOUs in the Social Security Trust Fund are not real assets--but merely obligations against future taxes" implies therein lies a vulnerability. Are you suggesting the faith and credit of the United States does not eliminate that vulnerability? Or, do you suggest a selective default of treasury obligations, targeting American Social Security recipients, is a possibility?

Michael Tanner: Its not that the government will default on the bonds--although it could default on SS benefits by, say, raising retirement age, but that the government still has to find the money with which to repay the bonds--$1.5 trillion in present value. No matter how good a credit risk I am, writing an IOU to myself does not make me richer.

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Portland, Ore.: Why not propose changes that will fully fund SSI rather then dismantle what is an effective and efficient system. Privitizing accounts in no way solves the funding shortfall.

Michael Tanner: Private accounts won't completely solve the funding shortfall, but it will reduce the unfunded costs by as much as half. Other changes to Social Security will probably be necessary, but individual accounts are a big part of the solution. Moreover, individual accounts are not just about solvency--they are about creating the best possible retirement program, one that gives workers ownership and control over their funds, and allows low income workers to accumulate real, inheritable wealth.

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Baltimore, Md.: I think it is a bit disingenuous of you to refer to the IOUs in the Social Security Trust as "not real assets." Would you say the same about T-Bills, generally thought to be one of the safest investment vehicles around?

Michael Tanner: Acrtually I was quoting the Clinton administration, which said that "the existance of large trust fund balances do nothing to provide for Social Security benefits." The Clinton Administration also said that the Trust Fund was a "bookkeeping" entry. The CBO, OMB, and others agree. Not because the government will default on the bonds, but because the government still has to find the money to pay them.

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St. Petersburg, Fla.: Your facts are incomplete. The idea tht the unfunded libility is over $10 trillion is only true under a worst case sceniro over the next 100 years. Secondly, the projected short falls are predicated on an annual GDP grothw rate of only 1.8 percent at the same time this administration is projecting grwoth rates of over 4 percent in their budget assumptions. They can not both be correct and they are probably both wrong. Historically the GDP grows at an average fo 3 percent. The funds owed to the Trust Funds are general obligateion of the government and failure to make payment is a default. The rate of retutn of the stock market is overstated if you pick any forty year period except the 90's. The 1 percent return on is based on non marketable bonds being issued to the trust fund. Finally, according to the GAO partial privatization will not solve the Social Security eventual deficit. Do you not agree it would be best for the adminsitration to realate the whole truth for a change instead of doctoring their reports to the public to fit their idelogical position? Wouldn't the truth from this administration be a refreshing change?

Michael Tanner: Because benefits as well as taxes are linked to economic growth. You cannot grow your way out of the crisis. Increasing economic growth brings in more taxes in the short-term but increases obligations in the long-term.

The worst 20 year return of private capital markets has been 3%. Social Security's rate of return (not the return on Trust Fund bonds, but the implieed return compaqring taxes paid to benefits received) for younger workers is estimated (by the Social Security Administration) at about 1 percent.

As I have said earlier, private accounts do not solve all of Social Security's financial crisis, but they do significantly reduce it.

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Mattoon, Ill.: Will employers still be required to pay their 6 percent of matching Soc Sec, if Bush gets his privatization plan passed? Or will they too only have to pay in 2 percent?

Michael Tanner: The various plans being discussed would let you privately invest between 2% and 6.2% of your wages (I prefer that latter). Any remaining funds would continue to be paid into the Social Security system.

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Montreal, Quebec: Michael,

Can you help clarify what my options will be as a so-called "younger worker." Under the President's plan, will I get to opt between private accounts and some pared down version of social security as it exists, or does my option consist in allowing me to divert a portion of my payroll tax into a private retirement account. If the latter is the case, am I going to be responsible for paying investment fees to whatever company is handling the account? and what is the remainder of my social security payroll tax going to cover (I presume the boomers' payments)?
Thanks.

Michael Tanner: You are correct. You would be able to put part of your taxes in an individual account, giving up some of your benefits in return. The size of the account could be as little as 2% of wages or as much as 6.2%. That decision has not been made. Your account would be invested in real assets--stocks, bonds, annuities. There would be administrative costs paid out of the account, estimated at 3/10 of a percent of assets managed by the SSA. You would continue to receive some benefits from SSA. Depending on the plan, that would either be through traditional benefits or in the form of a recognition bond that would "jump start" your account, based on your already accumulated benefits. The remaining portion of your taxes would help fund your remaining benefits, survivors and disability benefits, and benefoits for those already retired.

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Boston, Mass.: Don't people already have the ability to tuck away money tax deferred for retirement -- I believe it's called an IRA. Why do we even need this nonsense?

Michael Tanner: Two reasons. First because Socxial Security taxes are already so high (12.4%) that they squeeze out private savings options for middle and low-income workers. Those loiw-income workers would be the biggest beneficiaries of Social Security reform, being given the opportunity to save and invest just like wealthier people.

Second, because Social Security cannot pay promised future benefits. The system is unsustainable. As former president Clinton pointed out, there are only three ways to reform Social Security--raise taxes, cut benefits or invest privately. I think private investment is clearly preferable to other two options.

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Longmont, Colo.: You state that Social Security will run a deficit in 15 years yet I hear other sources say that it won't run a deficit until 2042 or 2052. Why the differences?

Michael Tanner: The other estimates count the Trust Fund as abn asset. I am talking about the date when the system begins to run an actual cash-flow deficit, requiring additional money beyond what payroll taxes bring in.

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Arlington, Va.: Does the CATO institute receive any funding from the Bush Administration to be the mouth piece for Social Security reform?

Michael Tanner: The Cato Institute does not take any government money of any kind.

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washingtonpost.com: That was the last question. Thanks to all who participated.

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