‘The System Is Broken,’ Social Security Panel Declares

President Bush’s Social Security Commission will embark on an aggressive campaign to demonstrate that the giant retirement system is headed for financial trouble in 15 years and needs a thorough overhaul, according to a staff report issued Thursday.

“The system is broken,” declared the commission’s co-chairmen, former Democratic Sen. Daniel Patrick Moynihan of New York and Richard D. Parsons, co-chief operating officer of AOL Time Warner, in the report’s preface. “Unless we move boldly and quickly, the promise of Social Security to future retirees cannot be met without eventual resort to benefit cuts, tax increases or massive borrowing. The time to act is now.”

The staff report represents an initial step in the commission’s strategy for generating support for allowing workers to set up private accounts with some of their payroll taxes. The public first needs to be convinced that the system as it has operated since its creation in 1935 is on the road to financial ruin; that, the commission hopes, will put people in a frame of mind to accept the huge shift to partial privatization of Social Security.

The full commission will consider the report at its meeting Tuesday.

The interim report’s strong tone drew an immediate challenge from Democrats and the politically powerful AARP, whose 33 million members make it the largest force in the influential seniors’ lobby.

Bush and his commission “are trying to pit younger generations against retirees,” said Rep. Robert T. Matsui (D-Sacramento), his party’s leading spokesman on Social Security. “They are trying to say Social Security is in shambles . . . and they are unnecessarily frightening young people.”

John Rother, the AARP director of public policy, said the staff report “has taken every opportunity to hype the problems that Social Security faces and has ignored completely the problems that are raised by partial privatization.”

The somewhat strident rhetoric of the report as well as its critics is just the opening salvo in what promises to be a major political clash this year and next over the future of the system that sends retirement and disability checks every month to 44 million Americans.

Congress is not expected to take any action on this issue, but President Bush is hoping the commission will generate public support for his privatization plan.

Individual accounts would allow workers to take personal control of some of the payroll taxes they now send to Washington. The money would be invested in a selection of mutual funds that could generate a better return for their retirement, according to the Bush administration. With individual investments, the staff report said, Social Security could become “a means of wealth accumulation and long-range investment, giving families resources they never had before, and widening the circle of Americans fortunate enough to pass on the accumulated results of their investments and hard work.”

The report says that Social Security’s cash deficits will begin in 2016, when the money it pays out in benefits will exceed the funds it collects from workers as payroll taxes. “For a person who is 50 years old today, Social Security will begin experiencing financial difficulties just when he or she reaches retirement age,” the staff report said.

However, Matsui said this analysis is an alarmist one and cited the large portfolio of U.S. Treasury securities held by the trust fund. Long before 2016, he predicted, Congress will have decided on a bipartisan plan to assure Social Security’s long-range solvency. He said President Bush should reach out to members of Congress to craft such a solution.

Social Security’s financial burden stems from the need to pay benefits for the retirement of the biggest generation in U.S. history, the baby boomers born in 1946 through 1964.

The ultimate financial crisis for the system will come in the year 2038, when all of the Treasury securities held as surplus in the Social Security trust fund will have been redeemed. In that year, payroll taxes will be sufficient to pay only 72% of benefits promised under current law. If nothing is done, it would become necessary to have major tax increases or major benefit cuts to close the 28% gap.

President Bush favors an overhauled system in which workers would use the funds from their personal accounts and be less dependent on the benefit from Social Security. His plan would be voluntary and, although no details have been offered, probably would be available for workers 45 and younger.

Under the president’s guidelines, benefits would remain untouched for current retirees or those nearing retirement.

The commission’s final report, expected this fall, presumably would offer a detailed plan on how a privatized system would work. Thursday’s staff report “does a terrific job of setting out both the stick and the carrot: the stick in the form of the financial crisis and the carrot in the form of a better Social Security system,” said Michael Tanner, director of the Social Security Privatization Project at the Cato Institute, a libertarian think tank that has strongly influenced the Bush administration’s work in this area.

For the opposition, Henry Aaron, an economist at the centrist Brookings Institution who joined Matsui at a news conference, declared that the staff report is “seriously off-track” in its discussion of the problems facing Social Security.