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Rescue Mission

What will it take to save Social Security? Acknowledging that real solutions involve pain, Times readers say they're willing to do more than presidential hopefuls George W. Bush and Al Gore have proposed.

Personal Finance editor


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© St. Petersburg Times, published October 22, 2000

Judy Sipes follows the debate over Social Security reform with keen interest. At 57, she hopes the benefits will be there for her to collect. Yet as a mother and grandmother, she is concerned about raising taxes on her children and grandchildren to keep the system afloat.

"There are no easy answers," she said. "I don't think there's any way you can make it totally fair for everyone."

But Sipes and many other St. Petersburg Times readers told us they are willing to try. More willing, in some cases, than presidential candidates George W. Bush and Al Gore, who are short on details in presenting their plans to keep Social Security solvent.

Sipes, a clerical worker at St. Petersburg Junior College, is ready to raise the retirement age to 70, trim benefits for the well-to-do and, if absolutely necessary, increase payroll taxes.

"Nobody wants to take responsibility for it because they don't want to get killed politically," she said. "But it's much better to do it now and have a plan."

At the heart of the problem is a decline in the number of workers per retiree, a trend that will accelerate in 2010 as the leading edge of the baby boom generation moves into retirement. Instead of 3.4 workers paying into the system for every retiree, as we have now, there will be just two.

Unless something changes, Social Security will begin paying more benefits than it collects in taxes about 2015. At first the shortfall can be made up by drawing down the Social Security Trust Fund, which holds a stash of government bonds. The bonds represent money the federal government has borrowed; still to be determined is where the money will come from for repayment. But even if the bonds are repaid in full, Social Security's old age and disability trust funds are projected to go broke in 2037, while its Medicare fund is expected to run out of money in 2025.

As Sipes has figured out, real solutions involve pain. Somewhere along the way we have to raise taxes or reduce benefits, said Ron Gebhardtsbauer, senior pension fellow with the American Academy of Actuaries in Washington and a leading expert on Social Security reform. The longer the delay, the more drastic the fix will have to be, he said.

"It's very difficult for a member of Congress to vote for pain," he said.

Or for a presidential candidate. Instead of talking about tax increases and benefit cuts, Gore and Bush focus on protecting the Social Security trust funds and allowing workers to invest for their own retirements. Bush calls for a "lock box" to prevent payroll taxes from being diverted to other purposes, while Gore recommends paying down the federal debt, then using the interest savings to extend the solvency of the trust fund another 12 to 13 years.

Many Times readers think talk like that is a step in the right direction, even if it isn't the final answer.

"Just as the best advice to anyone wishing to invest is to first eliminate your debt, the best advice to the government is to pay off the debt to the Social Security surplus," said 47-year-old Dave Morgan of Clearwater Beach.

"The then-real Social Security surplus could be bid to investment companies to make money by whatever means the investment company desires, most probably in equity markets," said Morgan, a pharmacology professor at the University of South Florida. "Let the sharks work for the common man."

Many readers are intrigued by the Bush and Gore proposals to create private retirement savings accounts. Bush would divert an unspecified percentage of Social Security taxes to individual accounts; Gore would allow workers to set aside their own funds, with matching contributions from the government.

"I would have loved to have been able to manage some, preferably all, of my Social Security deductions while I was working," said Patricia Keene, 63, of Seminole. A retired human resources manager, Keene said 401(k) plans have shown what workers can achieve if they have an incentive to save and invest.

"I couldn't do much when I was raising kids, but the last 10 to 12 years of my working life, I was able to build that account," she said. "I'm not a finance person. I just strongly believe in the free market and the fact that people can earn better returns in the markets."

Bill Pulver, 63, of Spring Hill, also thinks workers could earn better returns through investing.

"Yes, their pension can be reduced in negative growth years," he said, "but that would be more than offset by the more prevalent years of positive growth."

Typically, readers envision a system in which workers would have a choice of mutual funds for their Social Security investments. Bob McKnight, 76, of Weeki Wachee, suggests three index funds: one invested in stocks, one in bonds and a third in money market instruments.

"Let's start running Social Security like a business," he said.

But other readers worry that vast numbers of workers are not prepared to make wise choices regarding their money.

"If you expected them to have a private account, they wouldn't know where to start," said Charles Neugebauer, 71, of Spring Hill. He said he is struck by the people he sees paying inflated prices for cigarettes, candy and soft drinks at convenience stores. "Do any of these shoppers know anything about the benefits of compound interest, dollar-cost averaging or the Roth IRA?"

And some readers have figured out that private accounts don't do anything to help the solvency of Social Security unless those who set them up have their guaranteed benefits cut substantially. Otherwise, diverting billions of dollars from the system simply exacerbates the problem.

An AARP survey this summer found that most people favor private accounts when they are described in general terms, but that support drops dramatically when the accounts are paired with a reduced guaranteed benefit from Social Security.

Lawrence Baldwin, 74, of Tierra Verde, is concerned about the cost of a safety net for those whose private accounts lose money.

"I do not believe that the average worker, or even the above-average worker, has enough savvy to make investments," he said. "Some would win; some would lose. Those that lose would have to be supported by either you and me (more taxes) or by those who win."

Others say those who opt for private accounts should have to live with the results.

"Folks clearly have to understand the risk that if something falls through the cracks, we can't have the government coming in on a white horse to pull them out of the muck," said 49-year-old Randy DeVries of Largo.

Many readers think the government should invest some Social Security tax collections in the stock market. President Clinton endorsed such a plan last year but backed away from it in the face of Republican opposition in Congress. Bush opposes the idea while Gore ignores it in his campaign proposals.

To supporters of the idea, it's similar to an employer investing pension funds.

"It's statistically proven that diversification is the means to control risk," said Gene Cicero, 55, of St. Petersburg. He said investing a small percentage of Social Security funds across a broad spectrum of investments would improve returns without taking on undue risk.

"I am not this conservative in my investments, but I really believe this would solidify Social Security for all of us," said Cicero, who is retired from a retailing career.

What will it take?

Some readers believe strongly in leaving current benefits untouched and are ready to raise taxes to maintain them.

"I am not in favor of reducing benefits for future retirees even if it means increasing the deductions from working salaries," said Curtis B. Gaylord, 83, of St. Petersburg.

But others are willing to trim benefits to preserve the system. One of the most frequently proposed options is raising the age for full benefits, already scheduled to increase gradually from 65 to 67.

"As life expectancy increases, so should the retirement age," said Ernest Gibson, 80, of St. Petersburg. He isn't talking about a small increase, either. He suggests setting the retirement age at life expectancy plus three years. That would make it 76.7 for men and 82.5 for women, far beyond what anyone has proposed in Washington.

Yet when Social Security began paying benefits in 1940, most people didn't live long enough to collect them. Infant mortality rates were high, but even adult life expectancies were much lower than they are now.

For men, only 54 percent of those who were 21 in 1896 made it to age 65 in 1940. Those who did make it lived an average of 12.7 years after that. Fifty years later, 72 percent of 21-year-olds were making it to 65, and living, on average, another 15.3 years. For women, longevity gains have been even more dramatic. In 1940, 61 percent of 21-year-olds reached age 65. In 1990, 84 percent did. Life expectancy at age 65 increased from 14.7 years to 19.6 years.

Instead of the 9-million Americans 65 and older that we had in 1940, we now have 35-million. By 2030, that number is expected to double.

One alternative to raising the retirement age would be to trim or eliminate benefits for those with higher incomes.

DeVries, who earns his living managing rental properties, says he would give up Social Security if it would save the system.

"I understand that we have a problem," he said. "I'm not a greedy person. I don't need to be rich. If I were living comfortably, I would live with it. If we could correct the problem for the long term, I would be willing to just forget about it."

Social Security expert Gebhardtsbauer said setting income limits for Social Security is a popular solution if the limit is set high enough.

"In the polls that we've taken, people hated the idea when the threshold was $40,000, but at $100,000, you get a lot of people voting for it," he said. "People see it as getting the rich guy. I point out that the rich guy has paid in a lot more."

He said President Franklin D. Roosevelt didn't want a means test for Social Security because he wanted the program to be universally appreciated, an argument still advanced today.

"Once people think of Social Security as welfare, it gives it a stigma," he said.

But the formulas used to determine Social Security benefits already favor the poor, and some people would go even further in that direction.

"I believe strongly in the Social Security system as a support for those with the highest need," said Ross J. Canella, 66, of St. Petersburg. He suggests capping benefits and reducing cost-of-living increases for those at the maximum.

Judy Sipes says the real solution is for people not to be so dependent on Social Security.

"It was only meant to be a supplement, not a total retirement," she said.

Sipes said she expects the system will be preserved.

"I have a hard time thinking they'll just let it go totally," she said. "But there's no solution that's going to please everybody. That's for certain."

Shoring up Social Security

Social Security trustees project the current system will run short of cash in 2037. With only two workers for each retiree, the fund will be able to pay only 72 percent of promised benefits unless changes are made. This chart shows some of the possibilities for shoring up the system and the percentage of the expected shortfall each would correct.

Raise the retirement age

(Proposed change, Percent of shortfall covered)

to 67 by 2011 -6%

to 68 by 2024 -21%

to 70 by 2029 -68% *

Effect: Hard on workers with physically demanding jobs and on minorities with shorter life expectancies. Older workers may have difficulty finding jobs. An older work force may increase health care costs.

* Assumes retirement age will continue increasing as people live longer.

Make people work more years to get full benefits*

(Proposed change, Percent of shortfall covered)

Count 38 years of earnings in the formula -15%

Count 40 years of earnings in the formula -24%

Effect: Hard on workers who take time off for child rearing.

* Current formula counts best 35 years of earnings. Years with no earnings reduce benefits.

Reduce cost-of-living adjustment

(Proposed change, Percent of shortfall covered)

by 0.5 percentage point -37%

by 1.0 percentage point -74%

Effect: Inflation reduces living standards for older retirees. Older women already have a high poverty rate.

Reduce benefits for future retirees

(Proposed change, Percent of shortfall covered)

3% cut -16%

5% cut -26%

Effect: Hurts retirees dependent on Social Security as only source of income.

Use a means test to determine benefits

(Proposed change, Percent of shortfall covered)

Limit full benefits to couples with incomes of less than $31,000 -- 85%*

Effect: Turns Social Security into a welfare program, likely reducing public support. Discourages savings and encourages hiding of assets, tax avoidance.

* Assumes benefits phased out for couple with income of $31,000 or more. At $46,000, benefits would be reduced 30 percent. At $96,000, benefits would be cut 85 percent.

Raise payroll tax on workers

(Proposed change, Percent of shortfall covered)

By 1 percentage point to 13.4% of pay -53%

By 1.9 percentage points to 14.3% of pay -- 100%

Effect: Costly for employers. Burdensome for low-income workers, especially if Medicare tax also increases. Might cause workers to save less.

Apply Social Security tax to higher incomes

(Proposed change, Percent of shortfall covered)

Raise the maximum from $76,200 to $95,000 -26%

Eliminate the earnings cap -- 77%

Effect: Costly for employers. High-income workers would pay more tax while receiving little additional benefit.

Tax Social Security benefits

(Proposed change, Percent of shortfall covered)

Tax 85% of benefits -16%

Effect: Unpopular with retirees, although 30 percent would pay no taxes because incomes are low.

Invest the Social Security Trust fund in stocks

(Proposed change, Percent of shortfall covered)

Invest 40% in private investments -48% *

Effect: Could boost returns, but also would make government major player in the stock market.

* Percentage will vary with investment returns.

Create personal retirement accounts

(Proposed change, Percent of shortfall covered)

Divert 1 or 2 percentage points of payroll tax *

Effect: Worker carries risk of investment shortfall. Large transition costs from old to new system. Baby boomers caught in between could see benefits reduced.

* Solves shortfall only to the extent that guaranteed benefits are reduced for workers who open the accounts.

- Source: American Academy of Actuaries (

Here's what the presidential candidates say they'll do about Social Security:

Al Gore

Use interest savings from reducing the debt to extend the solvency of Social Security until "at least 2054.

No reduction in benefits or increase in retirement age.

Set up voluntary retirement savings accounts with a tax credit to match savings for married couples earning less than $100,000.

Give parents credit for up to five years out of the work force or working part time while raising children, credited at half the average wage.

Increase benefits for widows and widowers.

George W. Bush

Use all surplus Social Security funds to improve Social Security.

No reduction in benefits for current recipients and those "near" retirement.

No increase in payroll taxes.

Set up voluntary retirement savings accounts funded with a portion of payroll taxes, controlled by individuals and invested in "steady, reliable funds" that hold stocks and bonds. Accounts could be used for retirement or an inheritance.

No change in disability or survivors' benefits.

No investment of the Social Security trust fund in the stock market.

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