Special Report: Bush Social Security Commission's Bad Ideas

On Dec. 11, George W. Bush's stacked Presidential Commission on Social Security issued its report, containing not one but a series of recommended options — all of them undesirable — for revamping the nation's popular and hugely successful 66 year old system of social insurance. Given that the 16 commission members favor privatization and their charge was to develop a privatization plan, all three options take Social Security in that risky direction.

Conservatives have been trying to undo Social Security off and on for 60 years, and with the House of Representatives controlled by right wingers and Bush in the White House, this was their big chance. The commission's work caps many years and tens of millions of dollars in a massive public relations campaign to convince the public — especially young people — that the system is in danger of imminent collapse. To substantiate that claim, the commission's public reports, including this final one, selectively present the facts, engage in distorted reasoning and jump to unwarranted conclusions.

Approximately 45 million persons currently receive Social Security retirement, survivor and disability benefits. On average, the present system replaces about 42% of a worker's pre-retirement annual earnings. Additional demands will be placed on Social Security when some 79 million workers, born between 1946 and 1964, begin retiring in 2012 and by the fact that retirees are living much longer than was the case when the system was created.

However, even taking the "baby boomer" phenomenon and seniors' greater longevity into account, the Social Security trustees — the group of advisors who oversee the financing of the system — have repeatedly concluded that funding at present payroll tax rates will remain sufficient until about 2038 when contributions begin to fall short. Moreover, contrary to the privatizers' claims, that future shortfall can be fixed relatively easily, at the time it begins to occur, for example by slightly increasing the payroll tax, raising or removing the cap on taxable income (currently set at $80,400), or making the tax progressive so that workers who earn more pay proportionately more in taxes.

The president's commission was to have proposed a single plan for privatizing Social Security, but the recent steep decline in the stock market, together with other bad economic news, caused panel members to have second thoughts about the timing of their proposal. They have therefore produced three recommended "study options" and urged that these options be studied for at least a year before any action is taken. Critics charge the commission is obfuscating as well as denying Democrats a single privatization plan that they could take aim at during the 2002 elections.

The fundamental flaw of all three of the Commission's options is that they allow a "carve out" of several percentage points from the payroll tax that supports current retirees, and diverts these amounts to private investment accounts. This immediately drains the Social Security coffers, weakening the system overall and raising the likelihood that deficits — which will have to be made up out of general government revenues — will come sooner rather than later. In essence, the public will pay heavily to subsidize risky private investment accounts for some workers, while Wall Street brokerage houses enjoy a permanent windfall in brokerage fees regardless of what happens to investment earnings.

The most frequently criticized aspects of the recommendations are:

• All of them propose to cut benefits by tying projected increases to inflation instead of wage growth — over time, this will decrease benefit payments by as much as 42%.

• The options propose various other ways to cut benefits (for example, one option proposes raising the retirement age).

• None of the options would solve the long term financing problem in the relatively painless manner others have suggested, such as raising the salary cap on the payroll tax or making it progressive.

• All three options would require significant transition funds.

• None of the options addresses how Supplemental Security Income (SSI) programs would assist the blind, disabled and minor dependents of deceased parents.

Commission subcommittees frequently met behind closed doors, prompting House Ways and Means Social Security subcommittee ranking member Rep. Robert Matsui (D-Calif.) and Rep. Henry Waxman (D-Calif.) to introduce the Federal Advisory Committee Transparency Act of 2001 closing loopholes in public meetings law.

Summary of the Three Options:

First Option

• Allows worker to invest 2 percent of her/his payroll taxes in a personal investment account.

• At retirement, worker's benefits would be reduced by the total value of the personal account, compounded at a 3.5 percent interest rate.

• Because funds are diverted away from the Social Security fund, the existing financing problem would remain, eventually requiring benefit cuts and/or tax increases to make up a 28 percent shortfall by 2052.

Second Option

• Allows worker to invest up to 4 percent of her/his payroll taxes in a personal investment account up to $1,000 per year.

• At retirement, worker's benefits would be reduced by the total value of the personal account compounded at an interest rate of 2 percent.

• Changes the way that benefits are calculated by tying them to price inflation instead of wage growth, resulting in reduced benefits overall.

• Requires the government to fund transition costs up to $71 billion.

• Because funds are diverted away from the Social Security fund, the existing financing problem would remain, eventually requiring benefit cuts and/or tax increases.

Third Option

• Allows worker to invest 1 percent of annual income, plus 2.5 percent of annual income up to $1,000 in government matching funds, in a personal investment account.

• At retirement, the worker's benefit would be cut by the total value of the personal account, compounded at an annual interest rate of 2.5 percent.

• Offers incentives for postponing retirement, while penalizing early retirees.

• Requires the government to spend up to $55 billion per year to supplement the plan.

• Because funds are diverted away from the Social Security fund, the existing financing problem would remain, eventually requiring benefit cuts and/or tax increases.

Protests Over Benefit Cuts

Democratic leaders, organized labor, women's rights advocates, progressive groups and others immediately deplored the benefit cuts that would result under all three of the commissions' options. House Democratic leader Dick Gephardt (D-Mo.) said, "The president's commission, by insisting on privatization, produces a clear result: Social Security beneficiaries will see a cut in their benefits, workers will have to pay more into the system or both things will come to pass."

Women's rights advocates noted that the commission attempted to add several "sweeteners" to the options in an effort to appeal to women. One such sweetener is a purported increase in the widow's benefit to 75% of a couple's combined benefit (currently the widow's benefit is 100% of the higher earning spouse's benefit). The problem with that proposal, though, is that it provides widows 75% of a much lower combined benefit because all of the options require benefit cuts. In another attempt to entice support from women and low income workers, many of whom are people of color, a new minimum benefit equal to 100 — 120% of the poverty level would be created. But that minimum is based on 30 years of earnings at the minimum wage level — cold comfort to the vast majority of women, whose unpaid care-giving responsibilities make it impossible for them to accumulate 30 years of paid employment.

Experts, Others Critique Options

Social Security experts quickly critiqued the commission's recommendations, including its failure to adequately address the long range solvency problem. Henry Aaron and Peter Orszag of the Brookings Institute and Alicia Munnell of Boston College raised a series of questions, asking, among other things, where a projected $1 trillion in transition costs would be found. The trio especially criticized the fact that none of the plans restore long-term balance to Social Security.

The National Urban League charged that large cuts in guaranteed benefits would harm African Americans, children and the disabled. The League's Dr. William Spriggs noted that 22 percent of children who receive survivor benefits are African-American as are 18 percent of the disabled.

AARP executive director Bill Novelli said that "a year had been wasted" by the discussion of personal retirement accounts when the commission should have been addressing Social Security's long term solvency. "Personal retirement accounts are too risky to be a reliable solution to Social Security's financial problems," Novelli noted. And, Max Richtman, executive director of the National Committee to Preserve Social Security and Medicare, underlined that none of the ideas the commission is talking about would close the financing shortfall.

CBO Study Emphasizes Risk

The Congressional Budget Office (CBO) released a report in mid-December concluding that investors are about 25 percent more likely to realize lower returns over 10 years from a portfolio of stocks in the Standard and Poor's 500 Index than from the current system of Treasury Bond investments for the same period of time. The CBO report especially criticized privatizers' focus on only average stock returns and its downplaying of risk as profits are not guaranteed to investors. (In contrast, Social Security benefits are guaranteed for life, inflation-proofed and pay disproportionately higher amounts to lifetime lower income earners.)

Dean Baker, director of the Center for Economic and Policy Research, urged that advocates of private investment accounts produce stock return projections based on historical trends over several decades to show what investors could realistically earn — or lose.

Republican Leaders Distance Themselves

Sensing a negative public reaction to the commission's recommendations, even Rep. Clay Shaw (R-Fla.), who chairs the House Subcommittee on Social Security, said he would offer a resolution opposing any cuts in current or future benefits. Shaw is reported to have said that "Reducing benefits or increasing taxes will hurt many Americans, especially minorities and women, many of whom would be living in poverty if it weren't for their benefits." Senate Minority Leader Trent Lott (R-Miss.) distanced himself from the report, saying that the Senate is focused on other things right now.

Public Doubts Privatization

Poll results released in December show that 51 percent of voters oppose any effort to partially privatize Social Security if benefits have to be cut, although 40 percent say that they would like to see partial privatization. The poll, conducted by Democratic pollster Stanley Greenberg, also found that 38 percent of the public thinks Republicans are responsible for dipping into Social Security funds to pay for other government programs, while only 18 percent say Democrats are responsible.

More Information:

Attached to this report is a summary of the recommendations made by NOW and other member organizations of the National Council of Women's Organizations Women and Social Security Task Force, during a two-day conference at Airlie House in 1999.

"Strengthening Social Security for Women — A Report from the Working Conference on Women and Social Security," prepared by the Task Force on Women and Social Security of the National Council of Women's Organizations (NCWO) and the Institute for Women's Policy Research (July 1999), is available on the NCWO website; for a hard copy, call NOW's Government Relations Office at (202) 628-8669, ext. 101 or email request to govtrel@now.org.

Full texts of the President's Commission to Strengthen Social Security reports can be found at www.CSSS.gov. A Social Security Primer is posted at www.cbo.gov; the Social Security Administration's webpage also contains a women's page.

Many reports and analyses are on the website of the Center on Budget and Policy Priorities. The Institute for America's Future features a Social Security superpage.

For other reading, see "The Effects of Social Security on Child Poverty" (May 2000), available on the website of The National Urban League Institute for Opportunity and Equality.

And the current issue of Harpers' Magazine (January 2002) has a good article, "The Trillion Dollar Hustle — Hello Wall Street, goodbye Social Security" by Thomas Frank.

Airlie House Report Recommendations: Proposed Social Security Reforms

(All listed proposals and explanations are based on "Strengthening Social Security for Women: A report from the Working Conference on Women and Social Security." July, 1999. Arlie House, Warrenton, Virginia.)

Low Earners

• Combination Proposal: Modify the calculation of the primary insurance amount to increase benefits according to a 100 percent replacement rate below the first bend point ($6,060); 45 percent replacement rate between $6,060-$9,600 and phased out with a 15 percent replacement between $9,600-$15,871.

  Explanation: Although seemingly complicated, this proposal would provide a lifelong, full time minimum wage worker (earning $10,700) $7,818 in benefits (the current poverty level for a single individual) representing an increase of 13 percent over the current formula.

  (Presently, the Social Security Administration calculates a benefit based on replacement of 90 percent of a worker's average annual lifetime earnings up to $6,060; 32 percent of her average earnings exceeding $6,060 but under $36,516; and, for amounts over $36,516, 15 percent up to the current maximum earning base.)

• Special Minimum: Revise the current Special Minimum to lower earnings required to 50 percent of minimum-wage earnings for full-time, year-round work.

  Explanation: The current function of the Special Minimum is to serve as an entitlement to lowest-earning workers ($8,055 in 1999) based on ten years of work. Once eligible for the current Special Minimum benefit a worker can receive an entitlement of $26/month for each year worked beyond ten years of employment up to a max benefit of $560/month for 20 years. In revising the Special Minimum by indexing it to the federal minimum wage, as opposed to a set maximum earning base, any low-wage earner who earned an amount equivalent to a half-time minimum wage job worked year-round would receive a year of credit toward the Special Minimum. In doing so the revised Special Minimum would help women, many of whom work reduced hours to care for family members.

• Increase the Widow's Benefit to 75 percent of the couples joint benefit, capped at the maximum earner's benefit.

  Explanation: Currently, if a wife and husband had equal lifetime earnings each would receive a worker retirement benefit (because their own benefit would be greater than the 50 percent spousal benefit); when one member dies, the surviving member of the couple has only his or her own benefit, equal to only half of what they received during their marriage.

• Ensure that widows are not penalized by their husband's decision to retire early.

  Explanation: Because women live longer than men, they are more likely to experience poverty as a result of their spouse's decision to claim early retirement benefits. (Source: Social Security Administration, 2000) This problem will become even more significant when the full benefit age increases to 67. Any person retiring at 62 will have his or her benefits permanently reduced by 30 percent (instead of the current 20 percent) further aggravating the potential for female poverty.

• Raise benefits for Disabled Widows and Divorced Disabled Spouses to 100 percent of the retired worker's benefit.

  Explanation: Disabled widows should be treated like other disabled people, once they establish their disability. Disability issues affect a surprisingly high number of divorced spouses, more than one-third of all divorced spouses had health problems that were severe enough to cause them to apply for disability benefits and that more than one-fifth of all divorced spouses had health problems severe enough to meet the disability criteria established by the Social Security Administrations.

• Remove the seven-year limitation on benefit eligibility and the age 50 provision on disabled widows and make divorced disabled spouses eligible on the same basis as widows.

  (Currently, a disabled widow must become disabled within seven years of a spouse's death or seven years after last being eligible for benefits as a care-taking parent of surviving minor children.)

  Explanation: Even if the age 50 provision is met, widows younger than the normal retirement age of 62 receive only 82.5 percent of the normal benefit and widows younger than 60 receive only 71.5 percent. Not until a disabled widow reaches age 62 is she eligible to receive full benefits. Likewise, forcing women to adhere to an arbitrary time window (7 years) limits young and middle-aged disabled widows from receiving benefits, although like other disabled workers they too cannot work and have no partner to depend on for support.

• Increase Divorced Women's Spousal Benefit to 75 percent.

  Explanation: The Spousal Benefit, currently at 50 percent, is designed to be a supplemental benefit, but is insufficient when a single divorced woman tries to live on it. Raising this benefit acknowledges the larger costs of separate households.

  (Concern was expressed at the conference that improvements targeted to divorced women would be difficult to achieve and might hurt the overall viability of the women's reform package. Based on remarks made by Anna Rappaport, during conference proceedings.)

• Increase eligibility for Divorce Benefits by requiring a minimum of only seven years of marriage and a total of ten years in marriage and work history combined.

  Explanation: Since most marriages ending in divorce average less than ten years, a model based on a combination of up to 3 years of work and 7 years of marriage would more accurately mirror the standard worker requirement.

• Family Service Credit: Provide a credit to the lower earner (or single parent) for the years that her/his biological/adopted children are under the age of six, up to a maximum of $5,000 per year (50 percent minimum wage earnings in 1999, then index). Up to ten years of credit.

  Explanation: Such a credit would be a step toward acknowledging the unpaid work of the primary care-giver in the calculation of Social Security benefits. This credit, of course, does not reflect a true valuation of caregiving, but it is a step in the direction of compensating care-giving monetarily.

• Special Minimum: Up to ten care giving years (for the lower earning spouse or single parent) to count towards the Special Minimum benefit.

  Explanation: Adding Family Service Credits to the Special Minimum (as addressed in the Low-Earners Proposal) has the potential to be of particular help to single and divorced mothers (those not married long enough to qualify for spousal benefits) who may have had years out of the labor force or who may have earnings below the requirements because of family responsibilities.

• Caring Years: Provide two "Drop-Out" years for each biological/adopted child to the lower earner (or single parent) up to a total of four years.

  (Conference participants agreed that more research was needed to develop reliable estimates of the number of potential beneficiaries and the proposals' likely costs.)

  Explanation: This provision would allow for family care without affecting the calculation of Social Security benefits. This would be of value to women of relatively high earning.

• Adjust the maximum wage base by making all earnings subject to the payroll tax and credit them for benefit calculations.

  Explanation: Raising or eliminating the cap on wages subject to Social Security taxes is particularly desirable because this source of revenue would keep pace with the growth of wages over time. In order to maintain the relationship between contribution and benefits, the maximum benefits would increase in relation to the amount of payroll taxes. Instead of a tax measure, this proposal would functions as an equity measure ensuring that high income workers pay their share.

• Invest 40 percent of the Trust Fund in stocks.

  Explanation: This recommendation differs from other privatization plans in two important ways. First, investment would be made by a central independent organization, sharing risk across the entire system and holding down administrative costs. Second, only a portion of the surplus would be dedicated to this alternative investment strategy, thus limiting the system's overall exposure to risk.

• Increase the payroll tax 1.8 percentage points (0.9 each for the employer and the employee) in 2020 (or use general revenue).

  Explanation: If in the instance that the two previous solvency proposals would not address the current solvency problems and if the next three decades were to evidence very slow economic growth, then an increase in payroll tax would be needed to fund future benefits.