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
