Social Security: Heritage Foundation

President Bush has stepped up his campaign to win public and congressional support for restructuring Social Security.

Alison Acosta Fraser, director of the Thomas A. Roe Institute for Economic Policy Studies at the Heritage Foundation, and Rea Hederman, Senior Policy Analyst, discusses Social Security and the various reform proposals being discussed.

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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Alison Frasier: Thank you for joining us today to discuss Social Security. As you are aware, Social Security faces some tough challenges for us. On one hand, we need to create a pension system where seniors can enjoy a dignified retirement. But we need to balance our care for retirees, against the needs of the working generation and not burden tomorrow's workers with large payroll taxes. The longer we wait to fix Social Security's problems, the more painful the cuts and tax increases will have to be - each year costs $600 billion more.

Practically speaking, I (Rea) believe that Social Security reform should be implemented before the baby boomers start to retire. As the Baby Boom generation retires, it will become tougher to make the adjustments needed to fix Social Security. Which means that those of us who are post-baby boomers, will be faced with a lot of unpleasant options on how to reform Social Security for our own retirement.

I (Alison) share Rea's belief that fixing the system should happen soon. That way Congress and the President can create thoughtful solutions to bring the system into financial balance and to make the program work better for more Americans. If they wait then the fixes will be very painful and difficult and options will be quite limited.

We believe that Social Security should be reformed so that its problems will not be pushed to the next generation. Fundamentally, the system should be reformed so that 1) it is solvent 2) payroll taxes are not increased 3) Social Security should be a better investment than it is now.

Now on to the questions.

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Austin, Tex.: How can we say that privatization will help stabelize Social Security when it will takes Trillions of dollars of borrowed money to make the trnasition? We are going into more debt. Who will pay this debt and why is this debt not considered a bandage that will come back to haunt the younger generation?

Alison & Rea: First of all bear in mind that the system already owes $11.9 trillion more in benefits that it can afford to say. Think of this as taking on new debt to get some long term savings. It's estimated that plans to fix Social Security can vastly reduce this huge long-term liability. This is just like paying points and fees on to refinance your mortgage - you'll save hundreds of thousands of dollars, but pay a little up front to do this.

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Washington, D.C.: Has anyone analyzed, debated, or considered the impact that a payroll tax increase would have on when people retire? I have a moderate-to-high income but low wealth. Transferring an increasing portion of my marginal income dollars away from my goal of wealth building postpones the time when I can afford to retire. I wish people would start talking about this tradeoff.

Alison & Rea: Raising the payroll tax hurts a persons ability to save and slow the economy and reduce employment. Ironically payroll tax increases can exacerbate the problem because more people will choose to take early retirement instead of working and paying a higher tax. But your question about creating wealth is right on - raising the payroll tax severely reduceds the ability of folks to save - especially low income workers.

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Concord, Mass.: How will personal accounts solve the looming fiscal crisis of Social Security, as President Bush claims? Will it not require greater expenditure during the next several decades and is not the only solution to the program's fiscal problems some combination of upping the retirement age, raising the income cap on the SS tax, raising the tax rate itself, lowering the benefits and making mandatory the inclusion of state and local government workers?

Alison & Rea: You're right, personal accounts will require other adjustements to the program, such as reducing the growth in promised benefits to future retirees, raising the retirements age and things like that. However, personal retirement accounts promise the best opportunity for workers to accumulate a nest egg which will improve their total retirement income.

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Montepelier, Vt.: Ms. Frasier;

If benefit increases were to be pegged to inflation rather than average wage increase, shouldn't the inflation rate considered be the inflation rate of seniors' consumption patterns rather than the average inflation rate of the population as a whole that includes major deflationary items (because of massive imports) such as electronics and clothing that seniors do not tend to purchase? Wouldn't rising food and energy inflation be weighted more heavily meaning their inflation rate would higher than that of the population-as-a-whole?

Alison & Rea: THere are lots of ways to look at inflation indexing. You raise some good questions to be considered, but the important thing is to bring benefits in line with what the system can afford to pay - right now indexing to the unaffordable wage growth gives a disadvantage to earlier retirees.

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Washington, D.C.: I'm fascinated by this topic, and the fact that most of the media seem to be taking it as a given that folks expect to receive full Social Securitybenefits when they retire. I'm 39 and have always assumed in my retirement planning that SS benefits will be minimal, at best. Is there a relaible indicator of whether most folks my age and younger share that kind of opinion? ... if they do, it could swing the debate dramatically away from private accounts to maybe reducing the defined benefit / starting age.

Alison & Rea: THe real risk in Social Security comes if Congress does nothing. Right around the time you retire Social Securities benefits will automatically be reduced by nearly 27%. I(Rea) am in a similar age bracket. Poll numbers show that folks under 40 tend to favor reform now and are much more open to investing in personal accounts. The strongest supporters of personal accounts tend to be younger workers, while the strongest opponents tend to be those over 55, who would not be affected by the changes.

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Millersville, Pa.: I would like to know how much it will cost to delay action. Suppose that Bush is unable to get anything passed and the issue dies during his term, how much would it cost the system to deal with the issue four years later?

Alison & Rea: As we mentioned, each year that Congress waits the Social Security Administration indicates will cost an additional $600 billion - or $50 billion per month. This is because each year brings us one year closer to insolvency. THe time to act is now before the boomers retire.

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McLean, Va.: Good Afternoon,
It is my understanding that by eliminating the income cap, any funding problems for Social Security will be taken care of. Why do you reject this fair and equitable solution?
Thank You

Alison & Rea: Actually, eliminating the income cap would not save Social Security - it is a tweak around the edges which buys only a few more years of solvency. If you want to fundamentally change the system so that those who exceed the wage cap would no longer receive a benefit for all the taxes put in, you can buy a few more years of solvency. Social Security was based on a promise that you would get out what you put in.

However, completely elminating the cap is a huge tax increase that would have a devastating effect on the economy - particularly small business. This would mean fewer jobs and opportunities.

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Dorking, UK: Two questions. Social Security is insurance -- it is not a retirement investment program. So why the insistence that people can get a better return with private investment of some of the payroll tax?
My second question is how might changes to Social Security affect US treaty agreements that cover Social Security? I will receive Social Security because of combining quarters I worked together with my UK National Insurance stamps.

Alison & Rea: The fact is that Social Security is the main source of retirement benefits for most low income workers and in fact many Americans. While it is called an insurance program, it is not. Changing Social Security to include personal accounts will give everyone - especially low income folks - the opportunity to save and build a nest egg.

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Alexandria, Va.: IRAs and 401(k)s have been around for years but only a small percentage of eligibles make use of them. How will private savings accounts do any better at encouraging participation?

Alison & Rea: More folks will use personal accounts because they will be able to take a portion of what they are already paying for Social Security and sock it away in an account. This is different from other retirement options that are on top of this already large payroll tax.

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Yorktown, Va.: I agree that the Soc. Sec. costs must come down and believe that benefits can't be as generous as before. But nothing I've seen in the administrations proposed plan does anything to hold benefits, particularly in this administration's own tenure (workers 55 and older?) Do you agree, and if so then who else has a better plan?

Alison & Rea: You are right, there is nothing specific included in the President's plan for benefit adjustments - that is yet. He did put everything on the table except raising the payroll tax rate. We feel that it is imperative to adjust the growth in future benefits by switching to something the system can afford - such as inflation indexing. Many of the Congressional Social Security plans do have some kind of adjust for future benefits. We would add that this is the way to go since increasing taxes will only have a negative effect on the economy and further burden younger workers.

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Lexington, Ky.: You spoke of an $ 11.9 Trillion dollar deficit in the program. Yet that depends entirely on forecast assumptions that the economy will expand at only 1.8 percent per year for nearly the next 75 years. That is far below anything we have experienced for decades. In addition, if that assumption is used, how can anyone expect the stock and baond markets to produce the increased returns under private accounts. This looks like a total con game. I can produce any problem I want if I play with the numbers. At 2.6 percent growth, still low by historical standards, the problem VANISHES!

Alison & Rea: Some economists do disagree with the growth assumptions made by the Social Security Trustees. However, demographers believe that SSA Trustees underestimate the growth in life expectancy which would actually increase the debt for the program. The bottom line is that we cannot grow our way out of this problem. SSA Trustee assumptions have been widely accepted by most bipartisan economists over the past 15 years.

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Indianapolis, Ind.: Personal account holders would pay a 3 percent fee to cover administrative costs According the the Administration public statement about how the plan would work. The Thrift saving plans is .06 percent. Why the big difference for a fund that will be much larger? And why do account holders have to by an annuity (using part of their account balance to purchase it) 401(k) account holdiers don't have to at 59 1/2 it's your money...period. Why don't personal account holders have that same freedom?

I know a lot of this is still in the planning stage but why should I accept an investment option that isn't spelled out with more specifics. I feel like I'm being asked if I would like to make a million dollars without knowing the details.

Alison & Rea: Account holders would pay 3 basis points which is 0.3 percent to cover the adminsitrative costs - actually smaller than the Thrift savings plan. The BUsh plan calls for a mandatory annuity to ensure that no retiree would fall below the poverty line.

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Chicago, Ill.: Please explain to me how you and your fellow conservatives-- who, as I recall, used to be concerned with the issue of fiscal discipline and deficits-- can honestly endorse a plan whose start-up costs amount to trillions of dollars. Wasn't there a time when conservatives would pass on even good (Democratic) ideas by saying-- "sure, sounds great...but how are you going to pay for it?"?. Why is that not happening here?

Alison & Rea: Quite simply because the costs of doing nothing are higher than the costs of reform. On the one hand we will see tax increases or automatic benefit cuts while on the other hand you could see a system that will provide more money and flexibility upon retirement. Not only that, workers will own these accounts and be able to pass anything unused on to their heirs.

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Washington, D.C.: Didn't privatization of Social Security fail in the UK, Chile and other nations?
Isn't "Privatization" a pretext to kill Social Security?

Alison & Rea: THere are many, many examples of fixing Social Security internationally. Chile and the UK are only two. Australia and Sweden have highly successful programs along similar lines. The important thing is that all these programs have elements of success and some lessons we can learn from them. THey are not failures. For example, problems in the UK are not due to personal accounts but other elements of their broader public and private retirement systems. Chile, while it has had problems, is still a young system, many workers have not had adequate time to build up their personal accounts. Again, the U.S. should take the best of these systems and create something that will work for all Americans.

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Anonymous: Earlier today, AARP said that raising the income cap from $90k to $145k per year would eliminate 40 percent of Social Security's long-term shortfall. Now, you say that completely eliminating the cap (not raising it to $145k) will amount to no more than a touch-up around the edges.

Who's lying?

Alison & Rea: Raising the cap completely would buy more solvency but would not completely solve the problem. The AARP plan almost doubling the cap does not even solve half the problem. This means that we both agree that more needs to be done than just raising the cap.

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Goldsboro, N.C.: With the deceleration in wage increases due to outsourcing and foreign low wage competition, might the future problems with social security be somewhat exaggerated? A continuation of low wage increases is a life extender for the current system with major changes unnecessary. True?

Alison & Rea: First, we disagree on the future of wages. However, if wage growth slows, then Social Security is even worse trouble because it is a pay as you go system where todays' workers are paying for today's retirees, less wages will mean less tax revenue going to pay for these benefits now and in the future, making the system insolvent sooner and the debt larger.

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Lake Katrine, N.Y.: Many people are fearful that investing in the stock market will be mighty risky. Participants can still invest in the U S Government bonds that are presently used by the current system and at the same rate of return but will own their investment and will be able to leave it to whomever they choose. So if they chose this way of investing there wouldn't be any risk. Am I right on this?

Alison & Rea: There should be a limited number of options available for workers to choose from for their accounts. One option could indeed be a mix of bonds, in combination with US Government and other safe bonds. Other options would include a market index fund to lower risk and a mix of stocks and bonds that would automatically move from more stocks to more bonds as a worker grows older.

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Washington, D.C.: Hello!
Would you please explain your data? Social Security currently has a $1.7 trillion surplus -- how do you calculate an almost $12 trillion deficit? I have not read this data anywhere in the Washington Post or other newspapers -- where did it come from?
Right now social security is generating a surplus -- $176 billion last year, which masks the size of the general federal deficit, which was actually $600 billion. Why isn't this the crisis for supposed conservatives? It strikes me as craven shilling for the current administration.

Alison & Rea: The trust fund has $1.7 tillion in it - but this is not a real asset. Instead it consists of specially issued bonds from the US Treasury to the Social Security Trust fund. When these bonds come due, Congress can only pay it in 3 ways - raise taxes, cut other spending and use the savings, or new borrowing. These are the exact same options Congress would face if the trust fund did not exist.

The $12 trillion deficit, calculated by the Social Security Trustees, is over the long term.

You are right, the budget and spending is a big problem. The real threat to the economy, in terms of the deficit, comes from the long term obligations from entitlement programs like Social Security and Medicare that will dwarf the deficit of today.

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Baltimore, Md.: How will disablity and survivors benefits be impacted by private accounts. If someone gets disabled during a bear market are they out of luck?

Alison & Rea: Disability is an important insurance program that is separate from Social Security. All these changes being discussed now about fixing Social Security would not touch the disability program.

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Kirkland, Wash.: If investing in the market gives so much better returns, why is the Social Security Administration still investing the current surplus in goverment bonds? Shouldn't we shift the surplus over to the market?

Alison & Rea: Government should not be investing in the private market. This would result in huge political pressures being brought to private companies and bad decisions being made not for good business reasons, but for politics. In fact, we have seen this type of problem in other nations as well as many state and locally invested pension systems. For example, the State of Texas divested the public employees pension system of all of its Disney stock after business decision the company made that the legislature found objectionable. This cost the pension system (and all its workers) a lot of money.

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Annandale, Va.: Even while admitting that private accounts do nothing to help social security, the administration (and you and others) keep juxtaposing the crisis with private accounts as if they ARE a solution. Isn't this a bit like saying "we have a milk shortage. We better buy more chickens"?

Alison & Rea: There are two problems with Social Security - it is insolvent and it doesn't work well for many Americans. Personal accounts ARE an important part of the solution - they will solve one of the two fundamental problems of our retirement system - the amount of money folks can save and own for retirment. However, we have always maintained that personal accounts must be accompanied by benefit adjustments in order to make the system afforadable.

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San Francisco, Calif.: Has anyone tried to calculate the return-on- investment for social security funds? The simplistic answer is that the return is equal to the yield on the money that Social Security lends to the government in the form of bonds. However, that money is being spent by the government and, all things being equal, is taking the place of either increased taxes and/or increased government borrowing. What is the true yield of our social security money?

Alison & Rea: You are right, the trust fund is merely postponing the inevitable increase in taxes or decrease in spending. However, the rate of return to individuals on their Social Security taxes is very low, especially for younger and low income workers. For more on this, please see our calculator at heritage.org.

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Vienna, Va.: There will never be agreement on how to improve Social Security if the terms cannot be agreed upon. You dismiss calling it an insurance program by saying that there are many people that rely on it for their retirement income, and therefore it is a pension program. But if I die before retirement, I don't expect to get anything, just like I don't expect my car insurance company to owe me anything if I never have an accident. Social Security insures that I will not retire in poverty. If I never retire, then what I pay helps others, and I at least don't have to worry about being destitute if I do live to 100. That is the way it should work, and, wow, it does! There is no need to break it by getting the goverment in the business of investment brokerage--there are plenty of private companies for that!

Alison & Rea: PRAs are not for everyone, in fact they are voluntary under the President's plan as they should be. If you are concerned about investment options or do not desire to build up real assets to pass on, then choose to remain in the traditional system. In fact, it is one very sad and problematic aspect of Social Security that many, many workers pay into the system over their working careers and die before they can draw some or all of their benefits. This is particularly the case for low-income workers whose families are left with little or nothing after the death of a loved one. This is a prime opportuntity to change the course of the future for these Americans.

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Washington, D.C.: You claim that the trust fund is not a real asset -- then what is it? An accumulating surplus was the reason to raise payroll taxes back in '83 -- are you now stating that this was all a big fraud perpetuated on working Americans -- that we should just expect the Federal government to keep the money to cover for the recent tax cuts? Again, it sounds like the problem is our Federal budget is in such bad shape that it can't even make good on its obligations.

Alison & Rea: You have it right. The federal government cannot make due on its obligations over the long run. THat is why Social Security must be fixed sooner rather than later. If we want a Trust Fund with real assets - the only way to have funds owned and controlled by individuals, not the government.

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St Paul, Minn.: One of the earlier questioners asked about the concept of being able to leave the accumulated value of a private account to a beneficiary. As I understand the proposals, that option would be limited, would it not? Wouldn't I be required to use the proceeds from my account to buy an annuity? And then, if any is left over, I could use that as I wish. It seems to me this very appealing aspect of leaving an account with some value is being highly touted, but is a bit oversold, as many of us may not accumulate the wealth to be able to do so. Please clarify.

Alison & Rea: THe President's plan provides individals must purchase an annuity to ensure that they will have their basic living needs met. ANything above that level could be used as you choose either to draw down in lump sum to purchase a car or something else important or passed on to heirs. An annuity with survivors benefits could also be purchased.

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Washington, D.C.: Is the Heritage willing to work with AARP?

Alison & Rea: Heritage would be delighted to work with AARP to ensure the solvency of the system without raising taxes on younger Americans and to ensure the continued retirement security of today's retirees and improve the retirement propsects for tomorrow's retirees.

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Alison & Rea: Thanks for all of your good questions. No other policy issue being discussed today will have as big an impact on all Americans. This program needs to be fixed - Congress and the President should make it financially sound without jeopardizing the opportunities for our kids and grandkids and at the same time improves the retirement options for Americans and their families.

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