Unanswered Questions Dog Both Social Security Plans

By Justin Torres | July 7, 2008 | 8:26 PM EDT

(CNSNews.com) - Unanswered questions remain about both the Bush and Gore retirement proposals - but observers say the mere fact they have been offered represents a sea change in American politics.

Last month, Texas Gov. George W. Bush proposed a partial privatization of the Social security system; his plan would allow younger workers to invest a portion of the payroll tax in "individually controlled, voluntary, personal retirement accounts."

"These accounts will earn higher rates of return, have parameters of safety and soundness, and help workers build wealth that can be passed on to their children," said Bush, who did not name a percentage that would be allowed for investment, though numerous reports have indicated the figure is two percent.

Vice President Al Gore blasted the plan for turning the Social Security system "into a system of winners and losers," saying that "when Wall Street is booming, I know that plan sounds appealing. But in reality the Bush Social Security privatization plan would weaken our economy and undermine the basic guarantee of a minimum decent retirement."

But with polls showing a significant portion of the electorate favoring some form of privatization - 62 percent, according to a January CNN/Gallup/USA Today poll - Gore has recently unveiled his own retirement plan that allows for private investment.

Gore's plan would allow individuals to deposit tax-free income into accounts for retirement, first-time home purchases, catastrophic medical expenses or a child's college costs. The individual accounts would be managed by private financial institutions with matching contributions from the government in varying degrees according to income level - in essence, a public version of the popular 401(k) plan.

Under the Gore plan, for example, a married couple earning $30,000 could contribute up to $500 each to their privately-managed accounts and receive a $1500 tax credit, for a savings of $2000. The program would be paid for by budget surpluses and would be used to complement, but not supplant, Social Security.

Both plans are somewhat short on details - Bush framed his speech on Social Security as "principles," not a proposal, and said he wouldn't offer specifics until after the election - and contain unanswered questions, but the fact that both candidates have offered some type of Social Security reform proposal indicates that an overhaul of the ailing retirement system has vaulted to the top of the public's agenda.

That's a far cry from past elections, when Social Security was seen as the "third rail" of American politics - a subject so dangerous that attempts to change it could prove fatal to elected officials. In fact, in 1986, news of a Republican proposal to lower Social Security benefits marginally provoked an electoral backlash that many observers say cost the GOP control of the Senate in midterm elections.

Real change for Social Security looms on the horizon, then, but what form will it take, and will voters be prepared to accept it?

The Bush proposal, for example, would divert a portion of the payroll tax into market accounts. Presently, Social Security takes in more in taxes than it doles out in benefits, but that is projected to change early in the next decade, and by 2037, the system's savings will be exhausted. That missing two percent (privately invested) has to come from somewhere to keep the system solvent - either from cuts in benefits or a hike in payroll taxes.

Yet officials from the Bush camp say that present or near-retirees will receive full benefits, and stress that Bush would not raise payroll taxes. How does that add up?

It doesn't, says Roger Hickey, head of the Campaign for America's Future, which opposes privatization. Hickey calls it "arithmetically impossible" to maintain present benefit levels while allowing private investment.

"The fact is, current tax dollars pay for current benefits," said Hickey. "If you divert those funds out of the system for private accounts, you have to cut benefits to pay for the system."

Henry Aaron of The Century Foundation, which has recently released an analysis of the Bush plan, says even phased-in benefit cuts, timed to allow younger workers to grow their retirement accounts through payroll taxes, would require a 29 percent cut in benefits for older workers, and a 54 percent cut for workers under 30.

"While past performance indicates that a worker who is currently 30 years old might earn enough through an individual account to make up the . . . deficit, historical performance also suggests that the same worker might suffer a benefit reduction of 38 percent," Aaron and his coauthors conclude.

But Bush backers say the program - and associated costs for the transition from a pay-as-you-go system to partial privatization - could be paid for by present and future budget surpluses. Furthermore, they add, increased returns from private investment would more than cover any future benefit cuts for the majority of Americans.

Most importantly, though, Bush backers say the plan goes a long way to solving the looming Social security bankruptcy crisis.

"Many young people are afraid that they will never receive anything from the money they've paid into the Social Security, and it's a legitimate fear," says Dorman Cordell, a senior fellow at the National Center for Policy Analysis, which has advised Bush on economic matters. "This plan buttresses the system, which will surely fail if something isn't done."

And if the Bush plan could use some filling out, say conservative critics, the Gore plan leaves unanswered a host of fundamental questions.

Number one, say many critics, is the question of who will pay for the government's matching funds contribution, and how the Gore plan changes the fundamental instability of Social Security.

Gore's proposal would use a portion of the budget surplus to pay down the national debt, and credit the interest savings to Social Security - a move Michael Tanner, the director of health and welfare studies at the Cato Institute, calls "a bookkeeping gimmick that stuffs the trust fund with additional IOUs."

The Gore proposal would prop up the Social Security trust fund, pay down the national debt (essential to keep Social Security solvent on the books) and fund private retirement accounts though budget surpluses. All of this assumes, however, that today's good economic times would not only continue through 2037 - a highly unlikely proposition, considering the Federal Reserve's present enthusiasm for slowing the rate of growth - but actually increase over the next 35 years.

Given the likelihood of an economic downturn sometime in the next 30 years, says George Mason University professor Peter Ferrara, tax hikes would be necessary to fund Gore's proposal, which has been estimated to cost more than $40 billion per year.

"In contrast to the Bush proposal," says Ferrara, "what Gore has proposed is not a solution to the problem, but a new, expensive government entitlement program."

Further, say critics, the plan is unlikely to help low-income workers because they lack the resources to contribute $500 a year to a private account, "a problem made worse because they are forced to pay 12.4 percent of their income into Social Security," according to Tanner.

With these unanswered questions looming over both candidates' proposals - but with the public apparently hungry for changes to the program - the future of Social Security promises to become a key issue of debate this fall, for the first time in a long time.