Bush Calls for Historic Social Security Reform

Published March 1, 2005

President George W. Bush used his annual State of the Union speech on February 2 to call for sweeping changes to the nation’s Social Security system, a call that has been met with approval, doubt, and opposition from lawmakers and interest groups.

Bush also pledged to cut the federal budget deficit in half by 2009 and “give this nation a tax code that is pro-growth, easy to understand, and fair to all.” He delivered the remarks barely one week after the Congressional Budget Office released figures projecting this year’s federal budget deficit would hit $427 billion.

Bush focused the address on Social Security reform, the centerpiece of which is a plan to allow younger workers to invest some of their payroll tax contributions in stocks and bonds. Bush warned lawmakers that, without action, the Social Security system is on a path toward insolvency, the result of the nation’s aging population.

Reaction Decidedly Mixed

Some business and investor groups immediately came out in favor of the president’s proposal. Other organizations, such as the AARP (American Association of Retired Persons), slammed it. Democrat leaders in Congress have voiced their opposition, and some Republican lawmakers have expressed serious reservations.

More than 40 business organizations and companies–including the National Federation of Independent Business, National Restaurant Association, Hewlett-Packard Co., and stock brokerage firm Edward Jones & Co.–announced the formation of an alliance to support Bush’s efforts.

One enthusiastic supporter among federal lawmakers was Rep. David Dreier (R-CA), chairman of the House Committee on Rules. Dreier praised Bush’s address, saying on John McLaughlin’s One on One television program, “The president has provided hope for younger workers they haven’t had before.”

Surveys have shown young workers are more likely to believe in visitors from other planets than in Social Security being available for them at retirement.

The Bush plan would allow workers to pass on money in their private accounts to their children or grandchildren, which Dreier told McLaughlin should be “very appealing” to younger workers.

He also said Republicans in Congress are “enthused” about addressing Social Security reform.

Comments by other Republican lawmakers, however, reflect more trepidation than enthusiasm.

“I’ve talked to some of my colleagues and they’re panic-stricken,” said Rep. Mark Foley (R-FL) in an interview with Associated Press reporter Laura Meckler.

“Probably Not Doable”

Sen. Pete Domenici (R-NM) cited opposition from Democrats in telling Meckler, “Politically speaking, right now it’s probably not doable.”

During a news conference the day after the address, Sen. Chuck Schumer (D-NY) said, “Many of us believe that privatization … is a code word to destroy Social Security, not preserve it.”

Schumer said 44 Democrat senators had sent Bush a letter stating their opposition. If those senators hold their ground, they could stop any reform, because the remaining 56 votes would be short of the 60 needed to avoid a filibuster and move a bill through the Senate.

Democrats made their opposition clear even before Bush finished his speech. When Bush said Social Security would be bankrupt by 2042, Democrats in the gallery could be heard shouting “No! No! No!”

In a televised response immediately after the president’s address, Senate Minority Leader Harry Reid (D-NV) said Democrats “strongly disagree with the president’s plan to privatize Social Security,” calling it “dangerous.”

“Democrats are all for giving Americans more of a say and more choices when it comes to their retirement savings,” Reid said. “But that doesn’t mean taking Social Security’s guarantee and gambling with it. And that’s coming from a senator who represents Las Vegas.”

Unfunded Liability Growing

Since the program’s inception, Social Security has functioned on a pay-as-you-go basis, with current workers paying taxes to finance the benefits of retirees. Bush pointed out that the number of workers paying for each retiree has declined from 16 workers per retiree in 1950 to 3.3 now.

The ratio of workers to retirees is continuing to shrink, putting an ever-growing burden on workers to fund retiree benefits. Bush cited numbers from the Social Security Trustees report of 2004 showing Social Security will be paying out more than it takes in starting in 2018, with the shortfall growing larger each year.

“Social Security was a great moral success of the twentieth century, and we must honor its great purposes in this new century,” Bush said. “The system, however, on its current path, is headed toward bankruptcy. And so we must join together to strengthen and save Social Security.”

Proposed Investments Small

Under the Bush proposal, workers born before 1950 would not be affected in any way. They would receive their scheduled benefits with no changes. People born in 1950 or later would be given an option to take $1,000 of their annual payroll tax payment and place the money in an investment account they own and control.

Workers could then choose among five different stock and bond indexes in which to invest. The portfolio mix would become more conservative, with lower-risk investments, as workers near retirement. This is termed the life-cycle approach.

Workers would not be able to access their accounts before retirement, nor would they be able to borrow against the balance. Upon retirement, annuities would be used to give workers a steady stream of income over their post-retirement lifetime.

Some estimates suggest younger workers would see their annual rate of return increase from an estimated 1 percent currently to 6 percent under the plan.

Sticky Issues Remain

Opponents of such personal retirement accounts (PRAs) say they would leave workers vulnerable to market downturns. AARP President William Novelli told the St. Petersburg Times, “We don’t like the idea of putting risk in Social Security.”

Another concern is the diversion of funds from the current system into personal accounts. Opponents of PRAs have called this a “transition cost.” Other analysts say it is not really a cost, since debt owed at a later date is being paid off.

“We take on some debt of $100 billion a year for 10 years, but over the long term we’ve paid off $10 trillion of future liabilities,” said Grover Norquist, president of Americans for Tax Reform. “I will take that deal any day.”

Interest Rate Effects Debated

Because debt would be used to finance the initial transition, others have argued the Bush plan would increase interest rates. With the government competing with private markets for cash, interest rates would need to be increased to compensate for all the new capital required, critics say.

But in late January, the Bond Market Association stated the bond market would have no problem handling $100 to $150 billion of new bonding per year. In addition, Goldman Sachs issued a report showing the additional bonding would have little impact on interest rates.

The Bush administration may also seek to change the way Social Security benefits are calculated. Currently, a worker’s benefit is calculated based on wages, which historically have increased faster than prices. The president’s plan would base calculations on prices. Opponents of PRAs have seized on this issue as a benefit cut for younger workers. Supporters argue PRAs are likely to generate higher returns, offsetting any change in the benefit structure.

Tax Code Also an Issue

Bush said Americans “are burdened by an archaic and incoherent federal tax code.” In January he appointed two former U.S. Senators–Republican Connie Mack of Florida and Democrat John Breaux of Louisiana–to lead a bipartisan panel to study the tax code and recommend changes. Both men had served on the Senate tax-writing committee.

Recommendations are supposed to be delivered to Treasury Secretary John Snow by the end of July. Final recommendations are to be delivered to the president by the end of 2005.

Sandra Fabry ([email protected]) is a government affairs associate of Americans for Tax Reform. Steve Stanek ([email protected]) is managing editor of Budget & Tax News.