President Bush is predicting doom for America's social security system, but some

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Sat, 23 Apr 2005 13:52:41 -0700 (PDT)

 

 

President Bush is predicting doom for America's social

security system, but some critics are questioning his motives, says

David Teather

 

 

 

 

http://www.guardian.co.uk/elsewhere/journalist/story/0,7792,1399960,00.html

 

 

The case of the missing crisis

 

President Bush is predicting doom for America's social security

system, but some critics are questioning his motives, says David Teather

 

Thursday January 27, 2005

 

It is has been dubbed " the fake crisis " by its critics, and there are

many. Since re-election, the Bush administration has been aggressively

arguing that the social security system, which pays cheques to

America's elderly, is facing insolvency.

 

President George Bush insists the system is in need of dramatic reform

if it is to avoid going broke. At the heart of his solution is partial

privatisation; allowing individuals to divert tax dollars into

personal accounts that would be invested in the stock market and carry

the attendant risks and rewards.

 

It would be the most radical reform of social security since the New

Deal came into being 70 years ago and, as one commentator has noted,

do more to dismantle the programme than any of Mr Bush's Republican

predecessors managed to achieve.

 

The move is an _expression of the political capital Mr Bush believes

he gained in last November's election. The administration, though,

has, unwittingly or not, whipped up a red-hot domestic controversy to

rival that surrounding its foreign policy. And there has been an

equally forceful backlash.

 

" The people who hustled America into a tax cut to eliminate an

imaginary budget surplus and a war to eliminate imaginary weapons are

now trying another bum's rush, " the economist Paul Krugman wrote in

the New York Times.

 

Democrats are in the mood for a fight. Senate Democratic leader Harry

Reid described the Bush plan as a " disaster for the most successful

social programme in the history of the world " .

 

The administration already appears to be losing control of the debate.

The proposals are too heretical even for some Republicans to take.

Representative Bill Thomas of California, chairman of the house panel

that handles social security, and senator Olympia Snowe, a moderate

Republican on the senate finance committee, both urged caution over

the weekend.

 

" I think 'problem' is really what we're dealing with, " rather than

crisis, Mr Thomas said on NBC. Although by suggesting that retirement

ages based on gender, race and occupation should be considered he

created his own problems.

 

Ms Snowe on CNN also played down the sense of crisis. " First of all we

have to reach a consensus on the level of urgency and the magnitude of

the problem, " she said. There are she added " various scenarios and

interpretations " .

 

" The existing program, as it has been developed in the last 70 years,

provides a stable monthly income that has prevented seniors, almost

50%, from falling into poverty. I don't think we want to erode the

principles of that system, " she said.

 

Some 47 million Americans receive social security cheques of an

average close to $1,200 a month. Around two-thirds of pensioners rely

on social security for the majority of their income. For 20% it is

their sole source of support.

 

At present more is paid into the system than is paid out. That surplus

goes into a trust fund and by law is invested in US treasuries.

 

As baby boomers reach retirement age, however, the system is projected

to go into deficit in 2018, and cash will start to be withdrawn from

the trust fund. How long it will be necessary to dip into the trust

fund and whether it will be enough to get past the baby boomer blip is

anyone's guess.

 

The Congressional Budget Office predicts it will run dry in 2052 - the

administration forecast is 2042. Over the next 75 years the social

security trustees predict a shortfall of $3.7 trillion.

 

Others argue that if the economy keeps growing, that won't happen.

Even if it does, the payroll taxes the fund the system are still

expected to be enough to cover 70%-80% of benefits.

 

Roger Lowenstein, author of the book Origins of the Crash, questions

the assumptions put forward by the administration.

 

" The actuarial view is that the system is probably in need of a small

adjustment of the sort that Congress has approved in the past, " he

said in a recent exhaustive article in the New York Times.

 

" But there is a strong argument, which the (social security) agency

acknowledges is a possibility, that the system is solvent as it is. "

 

The real issue, Mr Lowenstein pointed out, could be that the

government has been spending the social security surplus and will need

to find the cash to repay its debts from 2018, causing even larger

federal deficits down the line.

 

The administration has so far been sparing in the details of its

proposals, with more expected at the president's state of the union

address next month. The plan, though, is expected to follow the

opinion of a commission set up to examine social security during the

president's first term.

 

The private accounts, diverting around one-third of individuals'

payroll tax, is the central idea.

 

But the private accounts fail to fill the administration's projected

funding gap. To achieve that, the proposal circulating in Washington

would change the way a retiree's payment is worked out.

 

Today he receives an amount indexed to wage increases. That would

shift to price indexing. Because inflation has grown in the past far

slower than wages, it would lead to benefits being cut by 40% in real

terms by 2075, according to some estimates.

 

The other issue thrown up by private accounts is the immediate impact

on federal debts. By allowing younger workers to shift cash away from

the trust fund, the Bush administration would starve the system of a

large chunk of revenue. The government would be forced to borrow a

further $2 trillion in the next 10 years on top of the already record

$5 trillion deficits run up in the Bush administration's first term.

 

Wall Street's role in managing the funds is also controversial.

Investment bank fees would effectively be deducted from social

security taxes.

 

Opponents argue instead that the Bush administration is creating a

climate of fear simply to push through partial privatisation as part

of its ideological efforts to create an 'ownership society'. The

system, if it needs fixing, could be adjusted with moderate tax

increases or benefit cuts.

 

Democrats have argued for raising the ceiling on the payroll taxes

that fund social security above the current $90,000 cap and lifting

the retirement age.

 

Laura D'Andrea Tyson, a dean of the London Business School, writing in

BusinessWeek, points to another easy solution.

 

Over the next 75 years the Bush tax cuts, largely aimed at wealthy

Americans, are projected to cost between $10 trillion to $12 trillion.

Simply paring the cuts back by a third and putting the cash into

social security would cover any funding shortfall.

 

Instead, through the introduction of private accounts and increasing

the federal deficit even further, President Bush, she said, is

" transforming an imaginary crisis into a real one " .