A Bad Plan: Private Accounts Would Exacerbate the Problem

While Social Security’s “Principal Problem Was A Long-Term Threat To Its Solvency,” Bush Focused On Private Accounts That “Would Exacerbate The System’s Fiscal Woes.” According to a report by Brookings Institution Senior Fellow William A. Galston, “If the Social Security system’s principal problem was a long-term threat to its solvency, as the President rightly argued in his 2005 State of the Union address, it was not clear how private accounts were even part of the solution. At best, they would function alongside of, and in addition to, needed fiscal reforms; at worst (and this turned out to be the case), they would exacerbate the system’s fiscal woes.” [Brookings.edu, September 2007]

Bush In 2000: “If We Do Nothing To Reform The System,” Social Security “Will Be Insolvent.” According to Bush’s remarks on May 15, 2000, “We are nearing social security’s greatest test. Eight years from now, the massive baby-boomer generation will begin drawing benefits. Their lives will be long and healthy. And within two decades, there simply won’t be enough younger workers to pay the benefits earned by the old. If we do nothing to reform the system, the year 2037 will be the moment of financial collapse. The system will be insolvent, with deficits in the trillions of dollars, requiring either a massive cut in benefits or a massive increase in taxes. [Bush Remarks, 5/15/00]

Bush In 2005: “We Must Join Together To Strengthen And Save Social Security” Because It Was “Headed Toward Bankruptcy.” According to President Bush’s 2005 State of the Union address, “One of America’s most important institutions — a symbol of the trust between generations — is also in need of wise and effective reform. Social Security was a great moral success of the 20th century, and we must honor its great purposes in this new century. The system, however, on its current path, is headed toward bankruptcy. And so we must join together to strengthen and save Social Security.” [Bush State of the Union Address, 2/2/05]

CBPP: “By Themselves, Individual Accounts Do Nothing To Improve Social Security’s Financial Condition.” According to the Center on Budget and Policy Priorities, “By themselves, individual accounts do nothing to improve Social Security’s financial condition. In and of itself, allowing Social Security revenue to be diverted into individual accounts — as a system of carve-out individual accounts would do — reduces the funds available for Social Security and thereby exacerbates the financial imbalance within Social Security. For example, establishing individual accounts by diverting two percentage points of the current payroll tax for all workers would accelerate the date on which the Social Security trust funds are exhausted — and Social Security revenue is sufficient to pay only about 70 percent of promised benefits — from 2038 to 2024. To reduce the actuarial imbalance within Social Security rather than to increase it, carve-out individual accounts must be tied to benefit reductions within the traditional Social Security program, and those benefit reductions must more than make up for the reduced revenue flowing into Social Security.” [CBPP.org, 8/21/01]

CBO: Argument “That Private Accounts Would Offer Higher Rates Of Return” Is “Misleading.” According to the Congressional Budget Office, “Some people argue that private accounts would offer higher rates of return than the traditional Social Security system does, but that argument can be misleading. Social Security has a low rate of return largely because initial generations received benefits far greater than the payroll taxes they paid; that difference would have to be made up even if the Social Security system was entirely replaced by private accounts. Moreover, investing in the stock market — through either private accounts or government purchases of stocks for the Social Security trust funds — is no panacea. Corporate stocks deliver a higher expected return than government bonds because they carry higher risks.” [CBO.gov, 9/1/01]

EPI: All Of The Commission’s Proposals “Would Require Large Benefit Cuts.” According to the Economic Policy Institute, “The presidential commission charged with offering options to privatize Social Security has completed its work. Seven months in the making, the commission’s final report shows clearly that the privatization idea is bankrupt. The proposals outlined during its last meeting on November 29 revealed that privatizing Social Security would require large benefit cuts that are not offset by higher returns from individual accounts. All workers would see declining standards of living if the commission’s proposed benefit cuts were enacted. Depending on which of the three proposals is adopted, younger workers would see disproportionate benefit cuts, as would African Americans, women, and lower-wage workers. In addition, the three proposals would require potentially massive infusions of tax dollars to implement.” [EPI.org, 12/1/01]

CBPP: “Transfers From The General Revenue” Needed To Establish Private Accounts “Would Result In Substantial Deficits Outside Of Social Security.” According to the Century Foundation and the Center on Budget and Policy Priorities, “The commission’s plans involve contributions into individual accounts that could amount to more than $1 trillion over the next 10 years and almost $3 trillion over the next 20 years. Aside from the additional payments that individuals could make (under one of the plans) on top of existing Social Security taxes, such contributions must come from one of two sources: funds diverted from the Social Security Trust Fund or funds transferred from general revenue. Given the dramatic deterioration in the budget outlook, transfers from general revenue would result in substantial deficits outside of Social Security. The commission appears unwilling to identify how such deficits would be financed.” [CBPP.org, 12/3/01]

Without Transfer Of “Vast Sums From The Rest Of The Budget” The Commission’s Plans Would Have Hastened Insolvency Of The Social Security Trust Fund. According to the Center on Budget and Policy Priorities, “The Commission plans rely on the transfer in coming decades of vast sums from the rest of the budget to Social Security despite the fact that surpluses outside Social Security have disappeared. While insisting that its critics specify where the money would come from for courses they wish to pursue, the Commission fails to indicate how any of the general revenue transfers it includes in its plans would be financed. The Commission report essentially rests on a ‘magic asterisk’ of unprecedented proportions. In the absence of general revenue transfers, all three Commission plans would accelerate the year in which Social Security becomes insolvent, as a result of the diversion of payroll tax revenues from Social Security to individual accounts. Data in the Commission report show that without general revenue transfers, the year in which the Social Security Trust Fund would become insolvent would be accelerated from 2038 under current law to the 2020s under the Commission’s plans.” [CBPP.org, 12/26/01]

Bush In February 2005: “I Fully Recognize That The Personal Retirement Account Is Not The Only Thing Needed To Solve Social Security Permanently.” According to the Associated Press, “President Bush, on a road trip to promote private Social Security accounts, acknowledged Friday that his proposal would not by itself fix the future financial problems of the retirement program. […] ‘I fully recognize that the personal retirement account is not the only thing needed to solve Social Security permanently,’ Mr. Bush said. ‘But it’s a part of the solution.’ The president has not spelled out the size of benefit cuts that would go along with the private accounts.” [Associated Press, 2/4/05]

“Both The Public And Lawmakers Recoiled” When Bush Conceded That Overhaul Would Require Benefit Cuts In Addition To Private Accounts. According to the Wall Street Journal, “As a candidate, Mr. Bush had never spelled out his Social Security plans, except to suggest that carving out private accounts would solve the program’s looming financial woes. When he acknowledged this year that they wouldn’t, and that future benefits would need to be reduced, both the public and lawmakers recoiled.” [Wall Street Journal, 10/20/05]

To Address Fiscal Troubles, Bush Proposed “Progressive Indexation” That Would Have Cut Social Security Benefits For People Earning As Little As $25,000 Per Year. According to a report by Brookings Institution Senior Fellow William A. Galston, “It was not until late April that the President addressed the system’s fiscal gap, proposing a formula change, ‘progressive indexation,’ that would have cut benefits for the upper 70 percent of future retirees, with those at the top losing the most. Some conservatives rejected, on principle, the proposition that the level of sacrifice should rise with income. ‘That’s an idea that comes from the left typically—means testing,’ said Rep. Paul Ryan (R-Wis). […] And while surveys indicated strong support for limiting benefits going to the wealthy, few Americans believed that workers earning $25,000 a year fell into that category. But that is where the President’s formula change began to bite. Workers earning about $36,500—again, no one’s idea of the ‘wealthy’–would have seen a long term benefit reduction of about 20 percent.” [Brookings.edu, September 2007]

Under Bush’s 2005 Proposal, Many Americans Would Have Faced Deeper Benefit Cuts Than They Would If Social Security Became Insolvent. According to the Center on Budget and Policy Priorities, “For many workers, cuts would be deeper than if no action were taken and Social Security became insolvent. The Social Security Trustees project the Social Security Trust Fund will be depleted in 2041. (The Congressional Budget Office projects this will occur in 2052.) The President has repeatedly characterized 2041 as the year when the system becomes ‘bankrupt’ (an inaccurate characterization because the system would still pay 74 percent of scheduled benefits at that time). Yet for workers who now make about $55,000 or more, Social Security benefits would be cut more deeply under the benefit-reduction proposal the President now has endorsed than if nothing were done to restore Social Security solvency.” [CBPP.org, 4/29/05]

White House Officials Debated Making A Deal Without Private Accounts, But Karl Rove And Others Argued Against It. According to the Washington Post, “White House aides have been locked in a debate over whether it would be a victory if Bush settled for a Social Security deal without private accounts. Some White House domestic policy officials have suggested that the savings that would flow from reducing future Social Security costs would go a long way toward fixing the government’s long-term financial problems. But Rove, among others, has told Republicans that it would be unwise, both from a political and policy standpoint, to reduce benefits without offering people the potential of better returns through personal accounts, aides said. ‘It gets no easier without private accounts,’ a senior White House official said.” [Washington Post, 6/16/05]