Questions and answers about the state of Social Security, reform proposals
Wednesday, December 12th 2001, 12:00 am
By: News On 6
WASHINGTON (AP) _ President Bush's Social Security commission is recommending three plans to let younger workers invest some of their payroll taxes in the stock market.
Bush formed the commission last spring to craft a proposal to restore fiscal stability to the retirement system by creating personal investment accounts. Starting in 2016, Social Security is expected to start paying out more in benefits than it takes in from payroll taxes because of the retiring baby boom generation.
Here, in question and answer form, is a look at the state of Social Security and the commission's recommendations:
Q: Why does Social Security face financial difficulty?
A: The retirement plan is a pay-as-you-go system, with today's workers paying for current retirees' benefits. As the large baby boom generation starts retiring, there will be fewer workers contributing and more people collecting benefits.
Q: What about money built up in the Social Security trust fund?
A: The trust fund actually doesn't contain money. It's been spent as part of the government's general revenue. But I.O.U.'s are building up in the trust fund and the government will have to find the money to repay the promised obligations, starting in 2016. Once the money owed to Social Security starts getting spent, it would be depleted by 2038.
Q: Why is there a push for personal investment accounts?
A: President Bush promoted the idea in his 2000 campaign. He wants to let workers invest some of the 12.4 percent of their wages being paid to Social Security in the stock market. Proponents say it would create ownership and encourage saving, and the return on the investments would mean workers could rely less on the traditional system.
Q: What's wrong with that?
A: Opponents argue that if money is diverted into a personal account, it can't be used to pay for current retirees. That money has to be made up somehow or benefits must be cut. Opponents also question whether it is a good idea to expose people's retirement income to the risk of the stock market.
Q: What is the commission proposing?
A: Three options for policy-makers to consider during the next year. The first would let workers divert 2 percent of their payroll taxes into a private account. They would still get traditional benefits, but that initial 2 percent investment would be deducted, plus interest. The return on investment in theory would make up for the reduction. The government would cover any shortfall to the system and no benefits would be cut. But the system still would face financial problems in the future.
Q: What's the second option?
A: Workers could invest 4 percent of their payroll taxes up to $1,000 a year in a personal account. They still would get traditional benefits, but that initial 4 percent investment would be deducted, plus interest.
Workers' traditional benefits also would be reduced from what is now being promised. The commission is proposing changing the formula in 2009 that is used to calculate benefits so they won't grow as quickly.
Q: What's the third option?
A: It's more complex. A worker who wanted to open a private account would be required to contribute 1 percent of his income to start it. The government would provide a 2.5 percent match. A worker still would receive traditional benefits, but that initial 2.5 percent investment would be deducted, plus interest. The benefits formula also would change in 2009 so benefits would be smaller than promised today. But in theory the investment returns would make up for any reductions. Workers also would be rewarded for working longer and penalized for retiring early.
Q: When would one of these plans be implemented?
A: Not likely anytime soon. The commission has suggested that Congress study the issue for a year before acting on anything. Many politicians don't want to tackle the issue until at least after next year's congressional elections.
And with the war on terrorism, disappearing budget surpluses, an economic recession and the stock market slump, the political will isn't there to take up the issue now.
Q: How much would an overhaul to personal accounts cost the government?
A: The commission pegged transition costs at $2 trillion to $3 trillion over 75 years.
Q: If lawmakers changed the formula to calculate benefits, how big of cuts do workers face?
A: Benefits now are tied to inflation, but the commission is proposing linking them to wage growth. Workers who will retire in 30 years could see cuts of 1 percent to nearly 33 percent in the traditional benefits they are being promised today. Supporters of private accounts say that returns on the investment accounts would make up those losses.