By Dr. Nayyer Ali

April 15, 2005

Bush’s Social Security Plan

After winning re-election, Bush claimed that he now had “political capital” and was prepared to spend it. After three rounds of tax cuts in his first term, and with a massive budget deficit, further tax cuts were out of the question. So instead, Bush is pushing a major change in one of the bedrock programs of the American safety net, namely Social Security.
The Social Security program, as anyone who is employed or retired knows, is a government run program that collects taxes from all working people (at about 12% of the first 90,000 dollars in earnings) and pays a monthly social security check to retirees based in part on their wages during their employed years, although the payments reach a maximum level fairly quickly.
Social Security is essentially America’s main pension plan, and because of its governmental nature, it is viewed as a guarantee by citizens. It was created during the Great Depression by President Roosevelt to ensure that the elderly would no longer be faced with grinding poverty once they were out of the workforce. It was also meant at the time to make it easier for older people to retire and make way for younger to obtain employment.
Social Security has easily been the single most popular government program ever created. Attempts to change or weaken it are viewed as politically suicidal, and it has been termed the “third rail” of politics. If you touch it, you die.
So why is Bush proposing a sweeping change? The Social Security system is currently solvent, as more money is paid in than is sent out as benefits. The surplus is being invested in US government bonds, which is a fancy way of saying that the government is spending the money and reducing its need to borrow from other sources. But in 2017, projections are that the program will go into deficit, as taxes will drop below payments. The program will then draw down all those government bonds it has been credited up to that point. But by about 2042, even that will be exhausted. At that point, taxes will only fund about 70% of projected benefit payments. In that distant future, the country will have to choose between cutting benefits or raising taxes to close that gap.
Bush is proposing that the current system undergo a major change. He suggests that instead of the current surplus being invested in government bonds, it be diverted into individual accounts controlled by each of us, just as we have our own 401k or IRA account. This diversion would amount to about 25% of the current tax going into Social Security. The balance would continue to fund the current system as best as it could. These accounts could invest in the stock market, and supposedly earn an even higher return. The net result is that retirees in 2042 would have so much extra cash in their private accounts that they would receive the full benefit they were originally entitled to without a tax rise.
Bush’s plan is facing major opposition. The Democrats do not want Social Security tampered with. The country does not seem convinced that a partial shortfall in benefits 40 years from now constitutes a crisis. Many critics also believe that investing in the stock market is risky, and confusing to many Americans. Even Congressional Republicans have been very lukewarm to the idea.
The other critique is that Bush’s math is off. His plan assumes very high rates of return in the stock market while also assuming a slow rate of overall economic growth in the economy. In the short run this can happen, but in the long run, stock prices march along with corporate earnings, and they tend to rise in line with economic growth.
Bush’s first major initiative since winning the November election is now in deep trouble. His approval ratings in the polls have slipped to the lowest level of his Presidency. It is a matter of time before he throws in the towel and gives up his Social Security scheme. Comments can reach me at
Nali@socal.rr.com

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