Social Security recipients will see their monthly paychecks increase by 2.7 percent next year, the government said Tuesday in an announcement that fueled debate about the future of the popular retirement program.
Noting that higher Medicare premiums would eat a substantial portion of the annual cost-of-living raise, Democrats used the report to launch another attack on President Bush's plan to set up private accounts for individuals within Social Security if he is re-elected.
On the campaign trail, Sen. John Kerry accused Bush of planning a "January surprise" to privatize Social Security and repeated that he would neither cut benefits nor raise the retirement age if he's elected. The White House has denied that Bush plans to fully privatize Social Security.
Bush defended his plan for setting up private Social Security accounts but said he would not cut benefits for retirees or those about to retire. He added that Social Security is "in pretty good shape" for Baby Boomers.
Although Iraq and the war on terrorism have dominated the presidential campaign, Social Security and Medicare--the government's two main "entitlement" programs for the elderly--have drawn increasing attention by the candidates in the home stretch, just as they have in past races.
But the contest between Bush and Kerry is different from past races--the first Baby Boomers will reach 62, or early retirement age, on Jan. 1, 2008, a year before the end of the next presidential term. And from that point on, the fiscal conditions of both programs will begin to deteriorate.
Yet in this campaign, many analysts say, neither candidate has honestly and extensively discussed the dire, long-term, financial straits of these programs--and the economic implications that each could have for the country if their growth isn't somehow contained.
In the short run, the country's financial condition can support Medicare and Social Security, which some analysts say gives a false sense of security about the challenge both systems will face in the next decade. Medicare may be the toughest to fix because medical costs in general are surging.
The 2.7 percent cost-of-living increase for Social Security recipients would be the highest since benefits went up 3.5 percent in 2001. They rose 2.1 percent in 2004. The increase for 2005 is based on the rise in the government's Consumer Price Index from the third quarter of last year to the third quarter this year.
On average, it would bring an extra $25 a month in Social Security paychecks next year, although Medicare premiums for office visits will jump by a record $11.60 per month next year and absorb a large share of the raise.
Kerry accused Bush of launching "an all-out assault on Social Security" by proposing to allow workers to use some of their payroll taxes to set up private accounts in the system.
The president defended his plan, which he has never spelled out in detail, and added, "My opponent wants to maintain the status quo when it comes to Social Security. That is unacceptable for younger Americans."
He added, "Nobody is going to take away the checks of those who are now on Social Security."
No single fix, analysts say
Many economists say there is no single fix for Social Security and Medicare, and that the U.S. will have to use a combination of approaches, such as higher taxes and benefit cuts, or in the case of Social Security, perhaps partial privatization.
Setting up personal accounts within Social Security is a controversial move, but the White House says that these accounts would expand Bush's concept of an "ownership society" and also give young workers a better return on their money.
The problem boils down to this: If young workers are permitted to put 2 percent of their payroll taxes into personal accounts, for example, that would take away 2 percent currently going to pay benefits of Social Security recipients.
The government would have to make up this financing gap--estimated conservatively at $1 trillion and liberally at $3 trillion--for years.
Borrowing would be about the only way to pay for this gap, said Eugene Steurle, economist at the Urban Institute. These total "transition" costs would vary according to how generous the privatization plan is.
"You are trying to finance two different systems at once," said Robert Bixby, executive director of the Concord Coalition, who added that he doesn't oppose private accounts but wants the public to understand the cost issues.
The White House looks at the transition cost issue differently. By adopting a system of partial privatization, said Joel Kaplan, deputy director of the Office of Management and Budget, the government would be simply recognizing huge future costs associated with covering young workers.
Building private nest eggs
As young workers build bigger private nest eggs, the administration argument goes, some of the future costs in paying them Social Security benefits would be removed--strengthening the system in the long run. And young workers, the White house believes, would be getting a better return for their payroll taxes.
Stock market ups and downs mean there would be more risks attached to private individual accounts, but analysts said the White House likely would put limitations on how and where the money could be invested.
Analysts said it is hard to gauge the viability of a Bush privatization program because he has not outlined it in any detail. Some expect a less-generous program to be proposed in the beginning to minimize strain on the system.
Kerry said in a speech in Pennsylvania that the Bush plan would undermine Social Security. If Bush hadn't cut taxes, Kerry claimed, there would be enough money in the Treasury to save Social Security for 75 years.
The Social Security system has a surplus at the moment, but in name only. All the payroll taxes that go into the trust fund are almost immediately borrowed by the Treasury to help meet its deficit--and pay for everything from fighting the war in Iraq to building post offices. The trust fund, in return, gets IOUs in the form of Treasury bonds, but must pay retirees with cash. Kerry criticized Bush for borrowing from the trust fund, but in the past Democrats have done the same thing.
The strain on Social Security will accelerate when large numbers of the Baby Boom reach retirement age in the next decade. By 2018, it will pay out more in benefit checks than it is collecting from current workers. By 2042, the system will not have enough money to meet all the promises to seniors.
Analysts faulted Kerry for saying he wouldn't cut benefits or raise the retirement age. "I think he's minimizing the problems to the point where you can't solve them," Bixby said. "He's taking realistic options off the table. Even if you forget about the private accounts, you can't fix the system through economic growth alone."
Brian Riedl, economist and budget expert at the Heritage Foundation, a conservative think tank, criticized Kerry's plan to rely on growth to fix Social Security. As wages rise in a stronger economy, he said, Social Security costs go up too--because benefits are tied directly to wages.
Steurle said politicians have overpromised benefits to Social Security and Medicare recipients and now are finding they can't deliver. One of the big problems with Social Security is that workers are retiring earlier than they did 10 and 15 years ago. Two things happen: They don't pay taxes into the system any more--and they collect Social Security longer.
The Medicare program faces an even worse financing problem than Social Security. Because of soaring costs and a new prescription drug benefit, the system will be unable to pay all its bills by 2015, according to a report issued by Medicare trustees this year.
Medicare expenditures rise
Expenditures for Medicare will exceed payroll-tax income this year for the first time since the program was created in 1965.
At present, more than 41 million Americans get Medicare benefits, but there will be 61 million in 16 years.
At the same time, there will be proportionally fewer workers paying into the system. For example, there are four workers for every Medicare beneficiary today. By 2051, there will be only two workers per Medicare beneficiary.
The Government Accountability Office reported this year that spending on Medicare and Medicaid, designed primarily for low-income Americans, will approach 20 percent of annual economic output by 2080 if something isn't done to control costs.
Bush said in a Florida campaign appearance Tuesday that he "kept his word" in modernizing and strengthening Medicare when Congress approved the prescription drug benefit for seniors. But, in fact, that benefit adds more than $534 billion to Medicare costs over the next 10 years without a clear indication of how it will be financed.
The White House is pushing discount drug cards to cut costs of prescription drugs. Bush also is trying to get more private health plans to cover Medicare recipients, and bring more competition to the system.
Kerry would cut prescription drug costs by requiring Medicare to negotiate better prices. He also would allow reimportation of prescription drugs from Canada and other countries.
A Kerry campaign paper said he would institute competitive bidding and payment restraints to control costs of medical equipment for the Medicare recipients.
CAMPAIGN 2004: THE ISSUES
President Bush and Sen. John Kerry have clashed sharply over Bush's plan to let taxpayers divert part of their Social Security payroll tax into personal retirement accounts, and also over Bush's Medicare prescription drug benefit.
Trust fund is expected to run out of money by 2052, according to the Congressional Budget Office.
GEORGE W. BUSH:
- Wants to give younger workers the option of putting part of their payroll taxes into personal retirement accounts instead of Social Security. Bush argues that such accounts would return a higher interest rate than Social Security does. Bush has not made a specific proposal indicating what portion of payroll taxes could be diverted in personal accounts.
- Promises no change in benefits for retirees or near-retirees.
- Opposes increase in Social Security payroll tax, saying the United States cannot tax its way out of the Social Security funding problems.
- Opposes Bush's plan to allow taxpayers to divert part of their Social Security payroll taxes to personal retirement accounts. Kerry says Bush's "privatization plan" would cut benefits 25 percent to 45 percent, an assertion rejected by the Bush campaign.
- Promises not to cut benefits or raise the retirement age for people who rely on Social Security. But he would consider proposals "making sure that high-income beneficiaries don't get more out than they pay in."
- Says long-term shortfall in Social Security can be solved through economic growth, fiscal discipline and a bipartisan approach.
Program's costs are projected to exceed those of Social Security starting in 2024.
GEORGE W. BUSH:
- Secured passage of prescription drug benefit under Medicare. A transitional program began in June, with some seniors getting discount cards. The main program begins in January 2006, with all Medicare beneficiaries able to sign up for prescription drug coverage.
- Estimated the drug plan's cost at $400 billion over a decade when plan was announced and passed, but revision put the cost higher--$534 billion.
- Says prescription benefit will not only improve elderly people's health but will be cost-efficient too, by preventing expensive treatments required as a result of seniors forgoing needed medications.
- Opposed Bush's prescription plan and says it should be overhauled. Kerry voted no in two preliminary rollcall votes related to the Bush plan but did not participate in the final vote. He says he returned to campaigning when it became clear the bill would pass even if he stayed to vote.
- Complains that Bush's prescription program does nothing to hold down soaring drug costs, and his campaign has labeled the Bush plan a "scandalous giveaway to the drug industry." Kerry says he voted for a Medicare prescription drug benefit as early as 1987.
- Promises not to cut Medicare benefits.
Caseloads down 54 percent since 1996.
GEORGE W. BUSH:
- Says he'll push for reauthorization of welfare reform programs. (The Clinton-era reform law that encouraged welfare recipients to move into the workforce continues through a series of temporary extensions.)
- Voted for Clinton administration's welfare reform plan in 1996.
Costs have more than tripled since 1990.
GEORGE W. BUSH:
- Says his administration provided waivers and flexibility to states, allowing eligibility under Medicaid and the State Children's Health Insurance Program to be extended to about 2.6 million low-income Americans.
- Supports the Family Opportunity Act, which aims to provide that parents of disabled children will not have to take such drastic actions as turning down a job or giving up custody of a child to stay under income limits for Medicaid.
Read the series of stories at chicagotribune.com/elections