Spin-Free Discussion of the President's Social Security Proposal

We have a long-run problem with social security. In 25 years, revenue from payroll taxes are projected to equal just 74 percent of projected benefit payments (this is when the President says that the system will be "broke," or "bankrupt"). There is an advantage to making modest reforms now rather than waiting until the problem is upon us. However, as we see it, there are problems with the President’s plan (and more importantly, problems with how it is being presented to us).

For many of us, the cure is worse than the disease. The benefit reductions under the President’s plan are so severe that every worker who earns more than $55,000 a year would be better off if the trust fund were allowed to reach insolvency and benefits were simply paid based on the revenues received at that time.

The benefit cuts for all but the poorest workers are large. The President's plan would hit workers in the middle the hardest. While workers earning less than $20,000 a year would not have their benefits cut, workers making $60,000 a year would have their benefits reduced by 40 percent. That's a big hit. (Click here to estimate how much your benefits would be reduced under the President's plan)

Private accounts make the benefit reductions even worse. In his televised press conference, the President said that "the money from a voluntary personal account would supplement the check one receives from Social Security." He didn’t explain that those opting for private accounts would have their social security benefits reduced substantially. Under the current benefit structure, a high-income worker ($60,000 a year) who retired at 65 in 2055 would get an annual social security benefit of $29,300 (all figures in 2005 dollars). Under the President’s plan, that same worker who opted for a private account would get a social security benefit of $3,750. That’s a reduction of 87 percent.

Workers who invest their private accounts in Treasury bonds are virtually guaranteed to lose money. The President touted allowing workers to invest their private accounts in Treasury bonds. However, the net return received from this option likely would be less than the additional benefit reduction required for those choosing private accounts. (Spin-watch: The President characterized Treasury bills as rock-solid investments when promoting them for private accounts. The same Treasury bills are referred to as nothing more than a "file cabinets of IOUs" when used by the Social Security Trust Fund).

Kids and Surviving Spouses Could be the Biggest Losers. We forget that social security is an insurance program that also protects against loss of income due to death or disability. Nearly $1 out of every $5 of social security benefits paid are for surviving children and spouses. Their benefits are at the greatest risk here. In addition to getting the same benefit cut as everyone else, survivors would have to pay back the debt that the deceased spouse owed to the Social Security system for having money diverted into a private account (the President forgot to tell us that part). In many cases, the debt owed would be greater than the private account that would be inherited, meaning that a surviving spouse is actually worse off for inheriting the account. Ouch!

A lot is at stake here. Potential reforms are unlikely to be pain free--we'll have to reduce benefits (hopefully protecting lower and moderate income workers), increase revenues, or do some of both. Please pay attention, and don’t be duped by a sales pitch.