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Social Security plan goes to heart of citizen-government relationship

WASHINGTON—When he delivers his State of the Union address Wednesday night to Congress and the country, President Bush will call for a radical change in Social Security that ultimately could reshape the relationship that Americans have with their government.

Bush would change not only the way this country safeguards its elderly—letting Americans take more risk with their tax dollars, possibly to reap more reward, or possibly smaller retirement benefits—but he also would roll back the role of government in American life.

If the president's Social Security plan becomes law, over time it could usher in a new conservative age, one in which Americans would look to themselves and their communities rather than the federal government to provide the financial safety net that prevents people from falling into poverty. Bush's new order, which he calls the "ownership society," eventually could displace the New Deal philosophy that's guided Washington and shaped American society since the 1930s.

"It would change the basic assumption that there is a contract between the American people and the federal government," said William Leuchtenberg, a historian and scholar of the New Deal era at the University of North Carolina-Chapel Hill.

It also would change the fundamental trust that Americans grant the government, both with their money and the responsibility to look out for those in "the twilight of life," as the late Sen. Hubert Humphrey, D-Minn., put it.

"This is a debate about the nature of society," said the Rev. John Staudenmaier, a historian at the University of Detroit Mercy.

The president welcomes that debate.

"I am going to continue to speak directly to the American people about this issue," Bush said last Wednesday. He plans to follow his State of the Union address with a barnstorming tour through four or five states calling for an overhaul of the venerated pension program.

It's hard to imagine today what American life was like before Social Security. Many men worked until they died because they had no money for retirement. Those who couldn't work relied on churches or civic organizations for help. When men died, their widows often lived with their grown children.

The combination of industrialization, immigration and the hard times of the Great Depression made that system untenable. "Where heretofore men had turned to neighbors for help and advice, they now turned to government," President Franklin D. Roosevelt said.

Roosevelt and Congress created Social Security in 1935. It takes taxes on the wages of working people and pays them out in pensions to the elderly.

Celebrating its third anniversary in 1938, Roosevelt boasted with some prescience: "The idea of Social Security, which some reactionaries used to label as alien to the American tradition, has become so firmly rooted here in America that business, labor, finance and all political parties now accept it as a permanent system."

Permanent perhaps—it grew so popular that for decades politicians dared not suggest anything that might weaken it—but it's required frequent changes.

Both the tax rate and the amount of wages taxed have been increased several times. The original tax rate was 1 percent on income up to $3,000 a year. Today the tax rate is 12.4 percent, split evenly between worker and employer, on the first $90,000 of annual income.

The original retirement age of 65 is being raised gradually. For those born after 1959, the retirement age will be 67 to qualify for full benefits.

That illustrates one reason that Social Security is again in need of a fix: People are living longer. The number of adults living to 65 increased by more than one-third between 1940 and 1990. And average life expectancy after 65 has increased over the same period by 2.6 years for men and 4.9 years for women.

Another reason is that there are fewer workers paying taxes to finance benefits for more retirees. In 1940 there were 42 workers paying taxes for every retiree drawing a check. Today there are about three workers for every retiree. By 2050, the ratio will be about 2-1.

The result: Social Security can't forever keep paying the full benefits promised today.

In 2018, it'll start paying more in benefits than it collects in taxes, according to the system's actuaries. When that happens, it'll start cashing in $1.5 trillion worth of U.S. Treasury Bonds bought during the years when its revenues exceeded benefits. That will force the government to come up with the cash—but cashing out the bonds will allow the program to pay full benefits until 2042, if the actuaries are right, or until 2052, if the Congressional Budget Office's economic projections are more accurate.

Once the bonds are exhausted, absent any other changes, the program would be collecting only enough taxes to cover about 73 percent of projected benefits, according to middle-of-the-road projections.

How big a dilemma is that? That's the debate, and it's as much about politics as economics.

Bush has been talking up the problem, hoping to build political support for change. A White House strategy memo recently noted that the threat to the system "needs to be seared into the public consciousness."

But he's backed off his earlier claim that the system faces immediate peril.

"The crisis is now," the president said in December, triggering a barrage of criticism noting that the threat of reduced benefits was at least 38 years away.

"The coming crisis," Vice President Dick Cheney said Jan.13.

"The problem," Bush said last Wednesday, repeatedly avoiding the word "crisis."

While even many Republicans lament that the president's campaign to overhaul Social Security started poorly, few analysts dispute that something needs to be done.

"There is a serious solvency problem," said John Laitner, an economist and the director of the Retirement Research Center at the University of Michigan. "There will be a crunch. There will be no more trust fund, and what's flowing in will be short. And that problem will probably get worse later in the century."

So, what to do?

Bush's main proposal is to let younger Americans, perhaps those under age 50, divert some of their Social Security taxes into private investment accounts. They would invest the money themselves, hope for good returns and keep the profits. At death they could leave it to their heirs.

This proposal is particularly appealing to younger Americans, who've grown up in a post-ྂs period in which the federal government grew less popular and the stock market had far more good years than bad. They also tend to believe the worst: that they'll never receive Social Security checks.

Enter politics: Ken Mehlman, the new chairman of the Republican National Committee, noted recently that the president's proposed personal Social Security accounts could bring a new generation to the party. That would help secure an enduring Republican majority in control of Washington.

But there are problems with private accounts.

First, they would divert as much as $2 trillion in taxes from the current Social Security system over 10 years. Bush would have to come up with that money somewhere to maintain the full benefits that he promises to those near or in retirement.

Second, private accounts do nothing to shore up Social Security. "They don't have any bearing on solvency," said Michigan's Laitner.

Therefore the president's proposal might have to include lower benefits in the future for younger Americans. In one option suggested by a 2001 commission, future benefits would rise at the rate of general prices rather than of wages, which would mean that benefits would rise much less than under the current system.

Even private account profits might not make up for the lower benefits. Younger Americans could end up with significantly less to live on in retirement, according to the Congressional Budget Office.

A typical person born in 1980, for example, would get $19,700 a year from Social Security under the current system, and $14,300 a year from a combination of reduced Social Security benefits and private account profits, the CBO estimates.

There are other options to balance the system's future income and costs:

_Raise taxes. Bush rules it out. But raising the tax rate a half percentage point would solve 24 percent of Social Security's projected shortfall, according to the AARP. Raising the amount of salary that's subject to taxes to $140,000 would solve 43 percent of the projected shortfall.

_Raise the retirement age. Gradually raising it to 70 by 2083 would solve 38 percent of the projected shortfall.

_Invest some Social Security trust-fund revenue directly in a stock fund. This would cut the projected shortfall by 15 percent.

Whether and how America will overhaul Social Security isn't yet known.

But this much is clear: Despite FDR's hope that Social Security was a permanent fixture on the political landscape and decades of proof that politicians tinkered with it at their peril, Bush has managed to open the debate.

(To check your retirement age for full Social Security benefits: www.ssa.gov/retirechartred.htm)

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(c) 2005, Knight Ridder/Tribune Information Services.

GRAPHIC (from KRT Graphics, 202-383-6064): 20050127 SOCIALSECURITY

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