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Q&A: What's wrong with Social Security?

By HELEN HUNTLEY
Published February 3, 2005

What's wrong with Social Security?

President Bush has turned the spotlight on the most popular government benefit the United States has ever created. He is trying to sell us first on the need for drastic change and second on his version of what that change should look like.

Here is a look at some of the key questions about Social Security and its future:

Q. Why is there a problem with Social Security?

Because the U.S. population is aging, fewer workers will be called on to support more retirees. In 1960 there were five people paying taxes to Social Security for every one collecting benefits. Now there are a little more than three workers and by 2040 there will be only two.

Wasn't the last increase in Social Security taxes supposed to fix this problem?

The 1983 tax increase along with a gradual increase in the full retirement age, were designed to build up a reserve to help pay for future benefits for Baby Boomers. This surplus of tax collections is what's known as the Social Security Trust Fund. By tapping the trust fund, we'll be able to continue paying full benefits in 2018, the year when benefit payouts begin exceeding tax collections. However, the trust fund is expected to be exhausted in 2042 (or 2052 by some estimates.)

Will Social Security actually go bankrupt?

No, but when the trust fund runs out, Social Security will not be able to meet its obligations in full. With the trust fund exhausted, the Social Security Administration says it would be able to pay only 73 percent of promised benefits by 2042 and 68 percent by 2078, although those partial checks would be larger than Social Security checks are today, even after accounting for inflation.

How much is in the trust fund now and how is it invested?

The trust fund contains about $1.5-trillion on paper. This money is "invested" in a special type of interest-earning government bonds. What that means is that the government has borrowed this surplus of Social Security tax money and has spent it on other things. Social Security taxes have subsidized the rest of the government operations, allowing other taxes to be lower.

How will the special government bonds be repaid?

Either by raising income taxes, cutting government programs or by taking on more debt by selling bonds to the public. This is how other government bond obligations are paid when they come due.

Since we have an overall federal budget deficit, spending more than we take in each year, couldn't we just run Social Security on a deficit too, borrowing the money to make up the difference?

Yes. So long as there are investors willing to buy government bonds, borrowing could be used to help close the gap between the taxes collected and the benefits paid. Deficit financing would be a change in the way Social Security has operated. It was founded on the idea that tax collections would cover benefits. Today's workers are paying the benefits of current beneficiaries with the expectation that future workers will pay their benefits.

How accurate are the projections for the future of the Social Security system?

They are educated guesses by professional actuaries based on fairly conservative assumptions about life expectancy changes, economic growth, immigration and birth rates.

Previous projections have had to be revised because they were too conservative. Ten years ago, the Social Security Administration calculated the system would become insolvent in 2029. Now the projected date is 2042. The Congressional Budget Office projects the date as 2052, based on different assumptions about economic growth.

The projections could be adjusted again as the underlying assumptions change. There are conflicting views on many of these assumptions. For example, some people think medical advances will allow people to live longer while others say obesity-related problems will cause them to die sooner.

How much would Social Security taxes have to go up to fix the problem?

The Social Security Administration says the system would be good for another 75 years if payroll taxes were immediately increased 15 percent or if benefits were cut 13 percent or if there were some combination of the two. The longer we wait to make changes, the larger those changes will have to be to bring the system into balance.

What would happen if we just taxed more of people's income?

Currently Social Security taxes do not apply to wages of more than $90,000. Increasing the income limit could be part of a broader solution. Removing the income limit without increasing the benefits of high-income taxpayers would take care of the shortfall, according to an estimate by the Social Security Advisory Board several years ago.

Could we pay Social Security benefits out of other federal taxes?

Sure, if we were willing to increase other taxes. The shortfall in the Social Security trust fund is estimated to be $3.7-trillion over the next 75 years. Rolling back the tax cuts of the last few years would generate about three times that much in additional tax revenue over the same period. However, Social Security would have to compete with other pressing needs such as Medicare.

What cuts in benefits might be made?

The possibilities include raising the retirement age, reducing benefits for higher-income retirees and changing the way initial benefits or cost-of-living adjustments are determined.

How many people collect Social Security benefits now?

About 48-million. That includes 8-million disabled workers and their beneficiaries and nearly 7-million family members collecting survivors' benefits.

What's the situation with Medicare?

Medicare's financial problems are far worse than Social Security's. In the Hospital Insurance Trust Fund, benefits will exceed tax collections this year and the trust fund will be exhausted in 2019. Medicare Part B (doctor bills and outpatient costs) and Part D (prescription drugs) are paid for by a combination of premiums and general tax revenues rather than payroll taxes. The Social Security Administration says the share of federal tax revenues devoted to Parts B and D will likely grow from just under 9 percent in 2003 to nearly 29 percent by 2030 and more than 50 percent by 2078. And that's assuming huge increases in beneficiaries' premiums and coinsurance.

President Bush's plan

President Bush is calling for significant changes in the way our country's Social Security system operates. The most striking is creating the option of private savings accounts for workers born in 1950 or later.

At this stage there is no detailed plan in place, but the basics of the president's concept have been released by the White House. Keep in mind that it is likely Congress would make significant changes to what the president is proposing before adopting any Social Security overhaul.

Q. What's the potential benefit of having one of these private accounts?

Primarily, the opportunity to earn a better return on your money. If your investment choices do well, you may end up with a larger retirement income than you would have had otherwise. In addition, your beneficiaries would be able to inherit what's left in your account at your death, if anything.

What would I give up?

Your regular Social Security benefit would be reduced if you chose a private account, although Bush has not said how much of a reduction he has in mind. In addition, you would take the risk of ending up worse off in retirement if your investments do poorly.

When could I open a private account?

In 2009 if you were born between 1950 and 1965, in 2010 if you were born between 1966 and 1978 and in 2011 if you were born in 1979 or later. You would not be eligible if you were born before 1950.

How much could I put in my account?

Initially, 4 percent of your wages, up to $1,000 a year. After that, the maximum contribution would increase by $100 a year plus an adjustment for inflation. The money would come from the payroll taxes you already pay.

How would my money be invested?

You would be able to choose from a small number of options similar to mutual funds, with varying levels of risk. Private money managers under contract with the government would do the investing, buying and selling stocks and bonds. The government would handle the administration.

Could I get my money out in an emergency?

Not before retirement.

What happens when I retire?

Most likely, you would not be able to take a lump sum payment out of your savings account. Instead, you would be required to put at least part of that money into an annuity that would make regular disbersements to you for life. The government wants to be sure your combined income, including Social Security and the annuity payments, is at or above the poverty level, which currently is $9,310 for an individual and $12,490 for a couple. Any extra money beyond what's needed to purchase the annuity could be withdrawn or left to your beneficiaries.

What happens if there isn't enough money in my account to buy the annuity?

Presumably you'd simply have less income. At this point there is no plan for bailing out retirees whose investments perform poorly.

What happens if I don't choose a private account?

You would stay in the regular Social Security program. However, President Bush has acknowledged that benefit reductions are a possibility for those who choose not to participate in private accounts. He has only promised that benefits would not be reduced for those now 55 and older.

Would private accounts solve Social Security's financial problems?

Not initially. In fact, they would make them worse for a time since part of the payroll tax would no longer be available to pay current benefits because it would instead be going into private account investments. The idea is that in the long run, the financial strain would be eased as workers with private accounts retire with reduced benefits. But during the transition period, the government would have to come up with trillions of dollars. Unless taxes are increased, that money would have to be borrowed.

What happens to disability benefits and survivors' benefits?

President Bush hasn't said.

--Information from Times wire services was used in this report.

[Last modified February 3, 2005, 19:36:16]