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White House Social Security Briefing

FDCH E-Media
Wednesday, February 2, 2005; 10:59 PM

Following is the transcript of Wednesday's White House Background News Briefing on Social Security.


_____Special Report_____
Social Security



BUCHAN: The briefing today is on background, so all of the comments here today are to be attributed to senior administration officials. It is also embargoed until the president delivers his speech tonight.

The president, tonight, as you heard yesterday from a senior administration official, will be talking about the need to permanently fix Social Security. He will make clear that he's willing to lead in a bipartisan way to boldly confront the challenges of Social Security and to make the choices necessary to make sure that Social Security is there for future generations. He will spend a good deal of his remarks tonight talking about personal accounts and how personal accounts would work. And the senior administration official is going to outline what the president will be saying on personal accounts and answer your questions.

With that, I will turn it over to the senior administration official.

QUESTION: Will there be a transcript?

BUCHAN: I believe so, yes.

QUESTION: Is there any reason why it would have to be on background, if it's after -- if it's embargoed until after he speaks?

BUCHAN: It's on background.



Thanks, everybody. I greatly appreciate you being here and your attention to this issue.

I'd like to say a little bit, first, about the basics of the Social Security problem and try to put the president's remarks tonight in some context.

The reason that we have a Social Security problem, of course, is a demographic one. We have an aging population. People are living longer. There are, therefore, many more retirees to support than was the case when Social Security was first created. In 1950, you had 16 people putting into the system for each one withdrawing benefits. Today that ratio is down to 3.3 to one. And by the time today's young workers hit retirement, that ratio is going to be down to two workers supporting each person on Social Security.

This is not a distant problem, this is a problem that is going to be felt within the next few years. The first baby boomers start hitting the retirement rolls in 2008. That's just three years away. The first baby boomers will turn 62 in that year, and they'll start drawing early retirement benefits. And data shows that the majority of people do take benefits at the earliest opportunity, at the age of 62. What's going to happen from that point forward is that we'll see an escalating cost growth in the Social Security system. And the consequence is that by 2018, we are projected to be owing more in annual benefits than the system will be producing in annual revenues.

Now, obviously, those cash deficits will be small at first, but at the point where they start to be felt, the federal government has to find additional money in order to pay full benefits that are owed. It can only do that via a couple of means. One is by borrowing money; one is by raising taxes; one is by cutting spending in other parts of the budget to try to make room. But the point is that from 2018 onward, the program is going to enter a phase of permanent and growing annual deficits, and the federal government is going to have to find additional money in order to make up for that, under current law.

Those deficits are going to grow pretty rapidly starting in 2018. In fact, by 2027, the annual deficits, above and beyond all the payroll taxes that the system is collecting, will be over $200 billion a year. By 2033, the annual deficits will be over $300 billion a year. And that's adjusted for inflation, that's actually in terms of today's dollars.

The basic nature of the Social Security problem is not one in which there is significant disagreement among the non-partisan scoring agencies. The Social Security trustees, the Congressional Budget Office, the General Accounting Office, President Clinton's Social Security Advisory Council, and certainly President Bush's Commission to Strengthen Social Security all agreed on the fundamental nature of the problem facing Social Security. And they all found that the program is on a currently unsustainable course. There are some differences between these agencies as to the specific numbers, but they all adopt the same tone and same general language in describing the challenge facing us going forward.

The Social Security trustees find that the program's permanent cash deficits begin in 2018. The Congressional Budget Office has that date occurring as late 2020. That's not a significant difference; that's only two years between the two of them, and they both reach the same conclusion, which is that we do need to act in order to put Social Security on a sustainable course.

I'd like to talk a little bit about some of things that are occasionally said about the severity of the problem, or the lack thereof. It is occasionally said or implied that this might be a problem that could go away by itself, that maybe if the estimates and projections turn out a little bit different than the trustees' projections, that perhaps we won't have a problem. This is, for lack of a better word, simply incorrect. The Social Security trustees each year do an analysis that shows what happens if things turn out differently from projected -- what happens if the economics are little bit different, what happens if the demographics are little bit different. That analysis shows that there's a 95 percent chance that the permanent deficits facing Social Security will start to hit somewhere between 2013 and 2023. So even under a wide variety of possible assumptions going forward, we're going to see the permanent deficits facing the program within the next 10 to 20 years to a 95 percent certainty.

The problem that we now face is not one that we can tax our way out of, for a very simple reason: The costs and the current program are growing faster than the underlying tax base. So if we were to raise taxes today to deal with it, and the costs of the program continued to grow faster than the tax base, then in the future, future generations would simply have to come back and raise taxes again.

It's also not a problem that, under the current system, we can grow our way out of. The current system is designed so that benefits grow as fast as wages and the economy grow. And what this means is that if the economy does grow faster than projected, then wages will grow faster than projected; we will collect higher revenues, to be sure, and we might be able to push off that 2018 date, or 2042 date by a few years, but we would also owe more benefits as a consequence of the higher growth. And the fundamental long-term picture facing the program would not change significantly.

Now, the president, as Claire said, has called for a permanent fix for Social Security, and he's going to express anew tonight his willingness and desire to work with Congress on the details and specifics of a permanent fix. In calling for action to make Social Security permanently sustainable, the president's position is very consistent with expert opinion over the last decade, at least. President Clinton's Social Security Advisory Council, the technical panel of the Social Security Advisory Board, the President's Commission to Strengthen Social Security, General Accounting Office, and the Social Security trustees have all in recent years called for action to make Social Security not only temporarily solvent, but permanently sustainable, or sustainably solvent. And that is certainly the message of the president tonight and the standard to which we believe reform should be held.

All of these non-partisan agencies have also been very clear that the earlier we take action, the better off we will be. No matter what your policy preference is -- whether it's on the tax side, or on the benefit side, or with respect to personal accounts -- our choices are best the earliest that we act. Every year that we wait to deal with the problem is a year that the problem in Social Security grows greater. The trustees' report -- the last trustees' report estimated that the cost of one years' inaction is approximately $600 billion. And all of the choices that would confront us next year or the year after would be just that much more difficult than if we acted now. That has also been a consistent message from the Social Security trustees, from GAO, CBO and others, that the sooner action is taken, the better off for everybody.

Now, the president is going to outline some specifics about the personal accounts tonight, and I'd like to go through a few of them. First of these is that there will be no changes in the current system for people who were born before 1950 -- these are people who are 55 and older now. If you were born in 1949 or before, you would not be impacted by any of the changes envisioned by the president for Social Security. You would not have any changes to your benefits; you would also not be participating in personal accounts.

For individuals who were born in 1950 or later, they would have the opportunity -- the voluntary opportunity -- to participate in personal accounts. If they wished, they could not choose a personal account and they could stay entirely within the current system. The president has said we want to make sure that system is reformed to be fiscally sustainable. Certainly, though, individuals have the option of not taking a personal account and paying the benefits that the traditional system would be able to pay.

With respect to the structure of the personal accounts, the administrative structure, we would establish a structure that is somewhat similar to the thrift savings plan that federal employees, like myself, participate in. This is a centralized administrative entity. It should lay to rest any suggestion that we're thinking of privatizing the Social Security system. The thrift savings plan is not a privatized system. It's actually -- it's publicly administered; it's administered by the federal government. And it enables participants -- like myself and like other federal employees -- to realize the advantages of investment gains by having personal accounts that can be invested in diversified and secure funds going forward, and also a number of safety protections that we want to be able to provide to Social Security participants.

Specifically, the investment options that individuals would have would be somewhat similar to the thrift savings plan. In the thrift savings plan, individuals are given presently a choice of five funds. There is a stock fund -- a large cap stock fund, a small cap stock fund, an international stock fund. There is a corporate bond fund, and there's also a fund of Treasury bonds. It's a very small, limited number. They're all broadly diversified. And the number of choices that individuals face is very limited, but also very simple. You don't have to be a financial genius to be able to save money in a thrift savings plan. And I'm living proof of that.

The thrift savings plan will also be offering shortly something called a life cycle fund. This is a fund where the proportion of the fund that is invested in stocks declines as an individual ages. And the closer they get to retirement age, the smaller the proportion of the fund that is invested in stocks. This life cycle fund works on the premise that when you are younger, you would want the higher growth and the more aggressive investment that would come from equity investments; as you get closer to retirement, by the reasoning of the life cycle fund, you would want a more certain -- not as high or aggressive a growth, but a more certain annual return in your investments as you head closer to retirement.

The life cycle fund would simply be another choice that's made available to participants in the Social Security personal accounts. For those workers who are nearing retirement, it would be offered as the standard choice. If people didn't make a choice to the contrary, they would be -- their standard selection would be deemed to be this life cycle fund. Individuals would have the opportunity to increase their amount of investments in other instruments beyond what is available in the life cycle fund, if they chose. However, they would have to sign some forms and get the sign-off of their spouse, if any, to show that they're aware of the implications of having a different investment mix that close to retirement.

The thrift savings plan has the virtue of offering very low administrative costs, certainly much lower than many have talked about with respect to Social Security personal accounts. For the types of personal accounts that I've just described, we have an estimate from the Social Security actuary of 30 basis points for the administrative costs -- that equates to 0.3 percent of account balances in a particular year.

One specification I would give about that is that the vast majority of those administrative expenses are actually for things like record-keeping, keeping track of the decisions made by individuals, and the amounts of contributions placed in their accounts. And those are, of course, transactions that would be handled by the administering entity, the administering government entity, as opposed to be handled by an outside entity, or a Wall Street firm or anything of the type. The thrift savings plan, for example, most of the administrative costs of that plan are actually administrative costs that are handled and financed by the federal government, as opposed to by Wall Street.

Participants would not be permitted, under the system, to have pre-retirement access to their personal accounts. The accounts will be held and protected to fund benefits when they hit retirement age. They would not be permitted to make loans to themselves through the accounts, nor would they be permitted to borrow against them.

Upon retirement, upon reaching retirement age, there would be some limitations on how they could withdraw money from the accounts. If an individual had a personal account balance, if they had chosen to take a personal account, they would not be able to withdraw money from their account to such a degree that by doing so they would move themselves below the poverty line. In other words, there would have to be a sufficient amount coming to them, in terms of a monthly inflation index benefit stream, from the traditional system and the annuitized portion of their personal account to be able to fund a poverty-level benefit.

Now, to the extent that their personal account enables them to have total benefits that are higher than that, they would have flexibility over the disposition of those funds. They would be permitted to leave those funds in the account to continue to appreciate; they could withdraw those amounts as lump sums to deal with a pressing financial need -- and, obviously, any additional accumulations in the accounts could be left as an inheritance. But the main restriction, again, to repeat, is that people would not be permitted to withdraw money from the accounts to such a degree that by doing so they would spend themselves below the poverty line.

The accounts would be phased in according to the age of the work force. The first year that we envision that people would have a complete investment control of their personal accounts -- 2009. We would have people born in 1965 and earlier participating in the accounts in those years -- in that year, if they chose. Those people, obviously, are roughly 40 years old or turning 40 this year.

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