ZOT! The real facts of social security, courtesy of FactCheck

In his State of the Union Address, President Bush said again that the Social Security system is headed for "bankruptcy," a term that could give the wrong idea. Actually, even if it goes "bankrupt" a few decades from now, the system would still be able to pay about three-quarters of the benefits now promised.

Bush also made his proposed private Social Security accounts sound like a sure thing, which they are not. He said they "will" grow fast enough to provide a better return than the present system. History suggests that will be so, but nobody can predict what stock and bond markets will do in the future.

Bush left out any mention of what workers would have to give up to get those private acounts -- a proportional reduction or offset in guaranteed Social Security retirement benefits. He also glossed over the fact that money in private accounts would be "owned" by workers only in a very limited sense -- under strict conditions which the President referred to as "guidelines." Many retirees, and possibly the vast majority, wouldn't be able to touch their Social Security nest egg directly, even after retirement, because the government would take some or all of it back and convert it to a stream of payments guaranteed for life. Analysis

Bush made Social Security the centerpiece of his Feb. 3 State of the Union address. He gave more details of how he proposes to change the system -- but left out facts that don't help his case.

Bush: The system, however, on its current path, is headed toward bankruptcy . And so we must join together to strengthen and save Social Security.

"Bankruptcy" is a scary term that Democrats have used too, when it suited them, but it could easily give the wrong idea. Nobody is predicting that Social Security will go out of business the way a bankrupt business does. It would continue to pay benefits -- just not as many.

The President was a little more specific about that later in his address, while repeating the word "bankrupt":

Bush: By the year 2042, the entire system would be exhausted and bankrupt . If steps are not taken to avert that outcome, the only solutions would be dramatically higher taxes, massive new borrowing, or sudden and severe cuts in Social Security benefits or other government programs.

But how severe would those benefit cuts be? In fact there are two official projections -- one by the Social Security Administration (SSA) and a somewhat less pessimistic projection by the Congressional Budget Office (CBO). The President referred to the SSA projection, which calculates that the system's trust fund will be depleted in 2042. After that, the system would have legal authority to pay only 73 percent of currently promised benefits -- and that figure would decline each year after, reaching 68 percent in the year 2075.

The CBO doesn't project trust-fund depletion until a decade later, in 2052, and figures that the benefits cuts wouldn't be so severe, a reduction to 78% of promised benefits. But either way, even a "bankrupt" system would continue to provide most of what's promised currently.

Furthermore, the President did not specify what he would do to fix the problem. He again urged creation of private Social Security accounts. But those would be of no help whatsoever in shoring up the system's finances, as acknowledged earlier in the day by a senior Bush administration official who briefed reporters on condition of anonymity:

"Senior Administration Official:" So in a long-term sense, the personal accounts would have a net neutral effect on the fiscal situation of the Social Security and on the federal government.

And that "net neutral effect" is just over the long term, 75 years or more. In the shorter term, creation of private accounts would require heavy federal borrowing to finance the payment of benefits to current retirees while some portion of payroll taxes is being diverted to workers' private accounts. The administration projects it will borrow $754 billion (including interest) through 2015 to finance the initial phase-in of the accounts, and much more thereafter. The liberal Center on Budget and Policy Priorities -- which opposes Bush's proposal -- projected that $4.5 trillion (with a "t") would be required to finance the first 20 years of the accounts after they start to be phased in in 2009.

The President made those private accounts -- which he now prefers to call "personal" accounts -- sound like a sure bet:

Bush: Here's why the personal accounts are a better deal. Your money will grow, over time, at a greater rate than anything the current system can deliver -- and your account will provide money for retirement over and above the check you will receive from Social Security.

History suggests that the President is correct -- the stock market has averaged a 6.8 percent "real" rate of return (adjusted for inflation) over the past two centuries, according to Jeremy Siegel, professor of finance at the University of Pennsylvania's Wharton School. The administration says a conservative mix of stocks, corporate bonds and government bonds would return 4.6 percent, even after inflation and administrative costs. And the administration also figures that private accounts would need to generate only a 3 percent rate of return to beat what Social Security provides.

But there's no guarantee that history will repeat itself. Markets are inherently unpredictable and volatile. At present, for example, all major stock-market indexes are still well below where they were five years ago.

The President made no mention of one crucial aspect of the proposed accounts -- anyone choosing one would also have to give up an offsetting portion of their future guaranteed retirement benefits. If their investments in private accounts returned more than 3 percent annually over the years, they would end up better off than under the current formula. But if those investments did worse, they wouldn't make up for the portion of benefits that were given up, and the owner of an account would end up worse off. The President didn't explain that trade-off.

The President also glossed over some severely restrictive aspects of the accounts he is proposing, saying flatly "the money is yours."

Bush: In addition, you'll be able to pass along the money that accumulates in your personal account, if you wish, to your children and -- or grandchildren. And best of all, the money in the account is yours, and the government can never take it away .

As described by the "senior administration official," the owners of personal accounts wouldn't be able to touch the money while they are working, not even to borrow. The money would remain in the hands of the federal government, which would administer the personal accounts for a fee which the official said would be about 30 cents per year for every $100 invested.

And even at retirement, the government would control what becomes of the money. First, the government would automatically take back a portion of the money at retirement and convert it to a guaranteed stream of payments for life -- an annuity. The amount taken back would depend on the amount of money the retiree requires to remain above the official poverty guideline. That's currently $12,490 for a couple or $9,310 for a single person. Only after the combination of traditional Social Security benefits and the mandatory annuity payments from the private account equal the poverty level would any remaining portion in the account be "yours."

"Senior Administration Official:" They would be permitted to leave those (leftover) funds in the account to continue to appreciate; they could withdraw those amounts as lump sums to deal with a pressing financial need -- and, obviously, any additional accumulations in the accounts could be left as an inheritance. But the main restriction, again, to repeat, is that people would not be permitted to withdraw money from the accounts to such a degree that by doing so they would spend themselves below the poverty line.

The President didn't mention the mandatory nature of these restrictions, calling them only "guidelines" and describing them only in positive terms:

Bush: (W)e will set careful guidelines for personal accounts. We'll make sure the money can only go into a conservative mix of bonds and stock funds. We'll make sure that your earnings are not eaten up by hidden Wall Street fees. We'll make sure there are good options to protect your investments from sudden market swings on the eve of your retirement. We'll make sure a personal account cannot be emptied out all at once, but rather paid out over time, as an addition to traditional Social Security benefits. And we'll make sure this plan is fiscally responsible, by starting personal retirement accounts gradually, and raising the yearly limits on contributions over time, eventually permitting all workers to set aside four percentage points of their payroll taxes in their accounts.

Feb. 4 Clarification: We originally used the term "clawback" to describe the sum of money that the government would require workers to use to purchase an annuity upon retirement. The White House does not use that term and specifically denies that the mandatory annuity purchase requirement constitutes a "clawback." We have removed our references to that term to characterize the mandatory annuity purchase. Sources

"The Short- and Long-Term Outlook for Stocks," Knowledge@Wharton website, The Wharton School, University of Pennsylvania: 2 June 2004. (Free subscription required.)

White House Office of the Press Secretary, "Background Press Briefing on Social Security," press release, 2 Feb 2005.

US Department of Health and Human Services, "Annual Update of the HHS Poverty Guidelines," Federal Register 13 Feb 2004: 7336.

What Social Security crisis?
Mark Alexander (archive)

February 23, 2005 | Print | Send

In 1935, wealthy liberal do-gooder Franklin Delano Roosevelt, the most notorious violator of Constitutional federalism in the 20th Century, found a clause in that venerable document authorizing the central government to provide retirement benefits for all Americans. Apparently, 100 years earlier, that clause did not exist. So claimed another Democrat, Tennessee's Davy Crockett, who rose on the floor of Congress and chastised his colleagues for their proposal to appropriate benefits for the widow of a distinguished naval officer.

Crockett protested: "I will not go into an argument to prove that Congress has no power to appropriate this money as an act of charity. Every member upon this floor knows it. We have the right, as individuals, to give away as much of our own money as we please in charity; but as members of Congress we...have not the semblance of authority to appropriate it as a charity."

Crockett was echoing the words of our Constitution's author, James Madison, who said, most eloquently, "I cannot undertake to lay my finger on that article of the Constitution which granted a right to Congress of expending, on objects of benevolence, the money of their constituents...." Madison further noted, "If Congress can do whatever in their discretion can be done by money, and will promote the General Welfare, the Government is no longer a limited one, possessing enumerated powers, but an indefinite one, subject to particular exceptions."

However, those words were long lost on FDR, who eviscerated federalism in his relentless endeavor to make the central government the agent of salvation for all ills. In June of 1934, he announced to Congress one lasting example of that endeavor -- his intent to create a nationalized Social Security program, ushering the United States into the ranks of Europe's welfare democracies. The nation was in the midst of the Great Depression, and FDR was funding his political dynasty by redistributing wealth. After all, as noted by George Bernard Shaw, "A government that robs Peter to pay Paul can always depend upon the support of Paul." FDR's plan, like all unbridled populist-entitlement programs, was popular with the democratic majority -- and helped ensure his re-election to office three times.

Social Security's first beneficiary was Ernest Ackerman of Cleveland, Ohio, who retired one day after the Social Security Act was signed into law 14 August 1935. A nickel was withheld from Ackerman's final paycheck, but he received his one-time lump-sum Social Security payment ... 17 cents.

That 12-cent return was the beginning of unforeseen things to come. Soon, congressional amendments added benefits for spouses, minor children and survivors, and by 1950 the program assured virtually universal coverage. 1972 saw the addition of the Supplemental Security Income (SSI) program (AKA "welfare"), and by 1975 the addition of annual Cost of Living Adjustments (COLAs) assured the SS juggernaut's exponential growth. In 1977, Medicare became an independent entitlement, spun off from the Social Security system. Today, despite its humble beginnings, the Social Security system confronts our young people with the grim prospect of paying for unfunded promises made to past generations.

Notwithstanding the "welfare reform" acts of the 1990s, when Social Security turned 65, SSI benefits covered 6,688,489 Americans at a cost of $32,165,856,000, while Social Security itself disbursed some $431,949,000,000 to 45,877,506 beneficiaries. However, those staggering numbers are mere chump change compared to what lies ahead.

President George W. Bush's modest proposal to reform Social Security appears to be a good start at diverting this behemoth from its collision course with insolvency. Predictably, though, the latest retort from the Left is, "What insolvency? What crisis?" Indeed, these do-nothing Demos claim the Fed's IOUs in Social Security's so-called "trust fund," combined with minor tweaks to the system, will keep it solvent for generations.

Well, not exactly. Unless Democrats plan to "tweak" the system by increasing both the retirement age and the current 12.4% SS tax, adding more government debt and reducing benefits, Social Security will not have the revenues to refund current IOUs and meet the SS revenue shortfall. IOUs? For generations, every dime forcibly taken from worker paychecks -- ostensibly to finance the non-existent SS "trust fund" -- has been taken from that fund and applied to other massive entitlement programs.

Social Security outlays now consume 4.28 percent of GDP but will exceed 6 percent in 20 years. There are two reasons for this growth: demographics and benefits increases.

There are 48 million Social Security beneficiaries today, but in 2030 there will be 84 million. In 1950, there were 16 SS taxpayers for every recipient. Now there are only 3.3 taxpayers for every recipient, and that will be reduced 30 percent by 2030. Additionally, when SSI was formed, life-expectancy was 61 years, which is to say, most Americans did not make it to 65. Now, however, average life expectancy is 77.

The second reason for the SSI balloon is that benefits have not been indexed to inflation. Future retirees are being guaranteed retirement increases that grow substantially faster than inflation.

Social Security, as currently managed, will incur an estimated unfunded liability of 27 trillion 2003 dollars over the next 75 years. To offset this jaw-slackening shortfall, President Bush has proposed the incremental privatization of some SSI taxes by allowing individuals under age 55 to invest in personal retirement accounts (PRAs). Additionally, Congress must resolve to index benefits to inflation.

The President's three-year PRA opt-in for SSI taxpayers born after 1950 would allow them to put up to four percent of their wages in their PRAs. At retirement, those invested in PRAs would be guaranteed to receive at least what their payout would be if they only had SSI income. But those beneficiaries whose PRAs have a higher return can share in that return, which reduces the burden on the SSI fund, and the principal balance is fully inheritable.

The PRA plan would "cost" about $664 billion in "lost" SSI revenue over the next ten years. Of course, this lost SSI revenue is merely revenue that's been moved to PRAs, and thus isn't available to "borrow" from the SSI trust fund for other entitlement programs -- and that's why the Demos are hopping mad. Still, all Americans need to understand that the PRA plan does not fully address the revenue shortfall crisis looming on the horizon. That crisis can be resolved only when Congress commits to bringing SSI benefits in line with SSI revenues. (For a comprehensive review of Social Security and the Bush Administration's proposal, see http://FederalistPatriot.US/news/ssi.asp)

Quote of the week...

"Personal retirement accounts should be familiar to [members of Congress], because you already have something similar, called the Thrift Savings Plan, which lets [you] deposit a portion of [your] paychecks into any of five different broadly-based investment funds. It's time to extend the same security, and choice, and ownership to young Americans."
--President George W. Bush

On cross-examination...

"Social Security is simply a tax. Like all taxes, the money collected is spent immediately as general revenues to fund the federal government. The Social Security trust fund does not exist, and Social Security 'surpluses' are nothing more than an accounting ledger showing that contributions exceeded benefits paid for a given calendar year -- not that the excess was put aside. ... Allowing people to opt out of Social Security would force the federal government to admit it has been stealing money from Social Security for decades. ... No matter what politicians promise, Social Security reform will not change the fact that your money is taken from your paycheck and sent to Washington, where it will be spent."
--Rep. Ron Paul

Open query...

"My financial adviser Ric Edelman...thinks the time to start educating people about money is when they are children. He's set up a retirement plan called the RIC-E-Trust that can provide retirement security. A $5,000 one-time tax-deferred investment at birth, with an average interest rate of ten percent compounded, means that a child would have $2.4 million when he or she is 65 years old. Who needs Social Security with that kind of nest egg?"
--Cal Thomas

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