Bush, Gore: 2 Cures for Social Security Ills

Fixing Social Security--in part by offering Americans new retirement-savings options--has become a key issue in the presidential campaign between Democratic Vice President Al Gore and Republican Gov. George W. Bush of Texas.

Following is a snapshot of the Social Security system’s problems and the candidates’ proposed remedies.

Q: What’s the trouble with Social Security--I thought it was “fixed” years ago?

A: Even with increases in payroll taxes in recent years, Social Security still will begin paying more in benefits than it receives in payroll taxes beginning in about 2013, when the baby boom generation begins to retire.

Demographics show that for the next 30 years the number of those over 65 and collecting Social Security will almost double to 83 million from 44 million, while the work force paying for those benefits will grow by less than 10%. Without changes, the system will run out of money in 2037, according to the latest government estimates.

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Q: Where do my Social Security taxes go now?

A: Workers’ basic Social Security tax is 6.2% of annual wages up to $76,200; employers match that amount. (Medicare takes an additional 1.45% from each.)

Last year, 84% of the $460 billion in Social Security taxes collected went to pay the benefits for current Social Security recipients. The other $74 billion--which constitutes most of the government’s projected budget surplus--was invested in Treasury bonds. The bonds, which essentially amount to claims on the government to pay benefits at a future date, make up the so-called Social Security trust fund.

While some argue that the trust fund is nothing but a pile of IOUs, the bonds amount to a sacred obligation on the part of the government for future payments. Even with the trust fund, however, the system will go bankrupt in 2037.

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Q: How would Gore’s plan work?

A: Gore’s plan would extend the day of reckoning for Social Security to about 2050, largely by banking on continued prosperity and the resulting budget surpluses. Gore favors using 62% of the surpluses over the next 15 years to retire Treasury debt--which he says would put Uncle Sam in a stronger position to eventually issue new bonds to fund future benefit claims.

Along the way, savings the government realized from lower debt costs (as debt is paid off) would be used to bolster the trust fund.

Gore also would spend $200 billion over the next 10 years to subsidize private retirement accounts for couples making $100,000 a year or less. The accounts would be similar to 401(k) plans, with the government matching a portion of an individual’s contribution, depending on income level. For couples making less than $30,000 a year, the government would put in $3 (via tax credits) for every $1 the couple invests.

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Q: How would Bush’s plan work?

A: Bush would set aside roughly $2 trillion of future surpluses for preserving Social Security. But he also wants to give individuals control over how some of their Social Security taxes are invested.

He wants to let workers invest about one-sixth of their Social Security payroll taxes and employer contributions in stocks and/or bonds in an effort to gain higher returns.

Those who choose that option would almost certainly have to accept a lower guaranteed Social Security benefit from the government. Bush hasn’t formally said so, but his senior economic advisor, Lawrence Lindsey, has.

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Q: What costs are involved in Bush’s plan?

A: Bush’s plan involves significant transition costs because, in the short term, the government would continue to pay the same or higher benefits but would be taking in less tax revenue if people are privately investing some of those taxes.

A study by the Center on Budget and Policy Priorities estimates that the transition cost would be $900 billion over 10 years. Gore contends that this cost, combined with Bush’s proposed $460-billion, five-year tax cut, would either plunge the government into deficit spending, require significant changes in Social Security eligibility and benefits, or force Bush to make deep cuts in existing social programs.

Bush says the transition costs can be paid out of budget surpluses over the next 10 years--another bet on continuing prosperity. To be fair, both candidates’ plans assume continuing prosperity. A recession, and plunging tax revenues, would upset either plan.

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Q: What about the other possible Social Security fixes, such as raising the retirement age, reducing benefits or raising taxes?

A: Experts say a long-term solution requires one or all of those options, but neither candidate is willing to advocate that at this point.

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Q: Would investing in stocks or bonds on their own give future Social Security recipients more money than if they stick with the current program, which “invests” in Treasuries?

A: That would depend on a number of factors, including how much benefits would be reduced under Bush’s plan to allow for private investments, what kinds of securities people invest in and how those securities perform. Bush argues that people would fare better under his plan because the stock market’s returns have historically been far above what Treasuries provide. But that is no guarantee.