This article concerns proposals to change the Social Security system in the United States. Social Security is a social insurance program funded through a dedicated tax. It is also known as the Old Age, Survivors and Disability Insurance program (OASDI), in reference to its three components. Social Security in the United States is a social insurance program funded through a dedicated payroll tax. ... For specific national programs, see Social Security (United States), National insurance (UK), Social Security (Sweden) Social security mainly refers to a field of social welfare concerned with social protection, or protection against socially recognized needs, including poverty, old age, disability, unemployment, families with children and others. ... A tax is an involuntary fee paid by individuals or businesses to a state, or to functional equivalents of a state, including tribes, secessionist movements or revolutionary movements. ...

President George W. Bush has called for a transition to partial privatization via individual accounts ("personal accounts") that could be invested in the stock market. Since he highlighted the idea in his 2005 State of the Union Address, the Social Security program has become the subject of widespread debate. Seal of the President of the United States The President of the United States is the head of state of the United States. ... George Walker Bush (born July 6, 1946) is a politician and currently the 43rd President of the United States. ... A stock market is a market for the trading of publicly held company stock and associated financial instruments (including stock options, convertibles and stock index futures). ... 2005 is a common year starting on Saturday of the Gregorian calendar and is the current year. ... Alternative meanings in State of the Union (disambiguation) The State of the Union Address is an annual event in which the President of the United States reports on the status of the country, normally to a joint session of the U.S. Congress (the House of Representatives and the Senate). ...

No candidate for major office from any political party has suggested that Social Security simply be eliminated, or overhauled without regard to the impact on the financial expectations of current or near-future recipients of Social Security benefits. Nevertheless, many of the proposals being debated could fundamentally change the system.

The current Social Security system

See main article: Social Security (United States). Social Security in the United States is a social insurance program funded through a dedicated payroll tax. ...

Social Security is funded through the Federal Insurance Contributions Act (FICA), which is a payroll tax paid equally by the employee and the employer. Covered workers are eligible for retirement benefits and for disability benefits; if a covered worker dies, his or her spouse and children may receive survivors' benefits. The program does not have individual accounts and tax receipts are not invested on behalf of the worker. Instead, current receipts are used to pay current benefits (the system known as "pay-as-you-go," or wealth transfer system). Federal Insurance Contributions Act (FICA) tax is a United States tax levied in an equal amount on employees and employers to fund old-age, survivors, and disability insurance portion of the Social Security system and the hospital insurance portion (Medicare). ... In the United States, payroll tax is tax that pays for two social insurance systems: Medicare and Social Security. ... Retirement is the status of a worker who has stopped working. ... The term disability, as it is applied to humans, refers to any condition that impedes the completion of daily tasks using traditional methods. ...

In each year since 1982, tax receipts and other income have exceeded benefit payments and other expenditures, most recently (in 2004) by more than $150 billion. [3] The accumulated surpluses are invested in Treasury securities (treasuries) issued by the U.S. government, which are deposited in the Social Security Trust Fund. At the end of 2004, the Trust Fund stood at $1.7 trillion. Since the surpluses are not invested in the private sector, but are used for other purposes within the federal budget, some politicians say that the Trust Fund is "empty" or has been spent. [4] Treasury Securities are bonds issued by the U.S. Treasury. ... The Social Security Trust Fund is the United States federal governments means of accounting for workers paid-in contributions that are in excess of current payments. ... The private sector of a nations economy consists of those entities which are not controlled by the state - i. ...

Current projections

OASDI Income and Cost Rates Under Intermediate Assumptions. Source: 2004 OASDI Trustees Report.[1]

According to current projections based on the system's current revenue and benefit structure, expenses will exceed tax receipts beginning in 2018 or 2019, although the Trust Fund will continue to grow for several years thereafter because its interest income will more than cover the difference. At some point, however, absent any change in the law, the Social Security Administration will finance payment of benefits through the net redemption of the assets in the Trust Fund. Because those assets consist solely of U.S. government securities, their redemption will represent a call on the federal government's general fund, which for decades has been borrowing the Trust Fund's surplus and applying it to its deficit. To finance such a projected call on the general fund, some combination of increasing taxes, cutting other government programs, selling government assets, or borrowing would be required. Public Document in the Public Domain File links The following pages link to this file: Social Security debate (United States) ... Public Document in the Public Domain File links The following pages link to this file: Social Security debate (United States) ...

The treasuries in the Trust Fund are projected to be depleted either by 2042 (OASDI Trustees' projection), or by 2052 (Congressional Budget Office's projection). At that point, under current law, the system's benefits would have to be paid from the FICA tax alone. Revenues from FICA are projected at that point to be sufficient to cover only about 73% of projected expenses.

Cumulative OASDI Income Less Cost, Based on Present Law Tax Rates and Scheduled Benefits. Source: 2004 OASDI Trustees Report.[2]

Public Document in Public Domain File links The following pages link to this file: Social Security debate (United States) ... Public Document in Public Domain File links The following pages link to this file: Social Security debate (United States) ...

Framing the debate

Retirees and others who receive Social Security benefits have become an important bloc of voters in the United States. Indeed, Social Security has been called "the third rail of American politics" -- meaning that any politician sparking fears about cuts in benefits by touching the program puts her- or himself in danger of not living long enough to regret it. Accordingly, advocates of major change in the system generally argue that drastic action is necessary because Social Security is facing a "crisis" -- Bush described it as a "structural problem" ([5]) and then, in his weekly radio address of January 15, 2005, said that Social Security "is on the road to bankruptcy" ([6]). In succeeding months, he pressed this theme even more forcefully, arguing in April that "without changes this young generation of workers will see a UFO before they see a Social Security check." [7] Third rail at Bostons South Station A third rail is a method of providing electricity to power a railroad, typically a mass transit system. ... January 15 is the 15th day of the year in the Gregorian Calendar. ... A UFO -- posed or genuine? A UFO or unidentified flying object in the original, literal sense is any airborne object or optical phenomenon, detected visually or by radar, whose nature is not readily known. ...

Not everyone agrees. The Center for Economic and Policy Research says that "Social Security is more financially sound today than it has been throughout most of its 69-year history" ([8]) and that Bush's statement should have no credibility ([9]). Liberal economist Paul Krugman, deriding what he called "the hype about a Social Security crisis", writes: Paul Robin Krugman (born February 28, 1953) is an American economist, who has written several books and who currently (as of 2005) is a columnist for The New York Times. ...

[T]here is a long-run financing problem.

But it's a problem of modest size. The [CBO] report finds that extending the life of the trust fund into the 22nd century, with no change in benefits, would require additional revenues equal to only 0.54 percent of G.D.P. That's less than 3 percent of federal spending - less than we're currently spending in Iraq. And it's only about one-quarter of the revenue lost each year because of President Bush's tax cuts - roughly equal to the fraction of those cuts that goes to people with incomes over $500,000 a year.

Given these numbers, it's not at all hard to come up with fiscal packages that would secure the retirement program, with no major changes, for generations to come. (from "Inventing a Crisis", New York Times, Dec. 7, 2004)

Other critics allege that Bush is opposed to Social Security on ideological grounds, as it is a form of governmental redistribution of income, which libertarian ideologues strongly oppose. [10] In economics, the gross domestic product (GDP) is a measure of the amount of the economic production of a particular territory in financial capital terms during a specific time period. ... The New York Times is an internationally known daily newspaper published in New York City and distributed in the United States and many other nations worldwide. ... An ideology is a collection of ideas. ... This article deals with the libertarianism as defined in America and several other nations. ...

Still other critics focus on the quality of life issues associated with Social Security, claiming that while the system has provided for retiree pensions, their quality of life is much lower than it would be if the system were required to pay a fair rate of return. The party leadership on both sides of the aisle have chosen not to frame the debate in this manner, presumably because of the unpleasantness involved in arguing that current retirees would have a much higher quality of life if Social Security legislation mandated returns that were merely similar to the interest rate the U.S. government pays on its borrowings. [11]

Proposals

Privatization

There are countries outside the U.S. that have set up individual accounts for individual workers, which allow workers leeway in decisions about the securities in which their accounts are invested, which pay workers after retirement through annuities funded by the individual accounts, and which allow the funds to be inherited by the workers' heirs. Such systems are referred to as 'privatized.' Currently, the United Kingdom, Sweden, and Chile are the most frequently cited examples of privatized systems. The experiences of these countries are being debated as part of the current Social Security controversy. The term annuity in current use in the insurance industry, refers to two very different types of legal contracts with very different purposes. ...

In the United States in the late 1990s, privatization found advocates who complained that U.S. workers, paying compulsory payroll taxes into Social Security, were missing out on the high rates of return of the U.S. stock market. They likened their proposed "Private Retirement Accounts" (PRAs) to the popular Individual Retirement Accounts (IRAs) and 401(k) savings plans. The sharp downturn of the stock market in 2000-2002 temporarily moved the issue of privatization to the back burner. But in the mean time, several conservative and libertarian organizations that considered it a crucial issue, such as the Heritage Foundation and Cato Institute, continued to lobby for some form of Social Security privatization. A stock market is a market for the trading of publicly held company stock and associated financial instruments (including stock options, convertibles and stock index futures). ... An Individual Retirement Account or IRA is a retirement plan account that provides some tax advantages for saving for retirement in the United States. ... The 401(k) plan is a type of retirement plan available in the United States. ... The Heritage Foundation, a think tank located in Washington, D.C., is considered one of the worlds most influential right-wing public policy research institutes. ... The Cato Institute is a non-profit public policy research foundation (think tank) with strong libertarian leanings (despite wide public perception that it is a conservative think-tank), headquartered in Washington, D.C. It is named after Catos Letters, a series of early 18th century British essays expounding the...

Partial privatization

Bush has discussed the "partial privatization" of Social Security since the beginning of his presidency. But only since winning reelection in 2004, has he begun to invest his "political capital" in pursuing changes in earnest. Presidential electoral votes by state. ... This article concerns places that serve as centers of government and politics. ...

In May of 2001, he announced establishment of a 16-member bipartisan commission "to study and report specific recommendations to preserve Social Security for seniors while building wealth for younger Americans", but this general instruction was narrowed by the specific directive that it consider only how to incorporate "individually controlled, voluntary personal retirement accounts". [12]. The "Commission to Strengthen Social Security" (CSSS) issued a report in December 2001 (revised in March 2002), which described three alternative plans for partial privatization: In a two-party system (such as in the United States), bipartisan refers to any bill, act, resolution, or any other action of a political body in which both of the major political parties are in agreement. ...

• Plan I: Up to two percent of taxable wages could be diverted from FICA and voluntarily placed by workers into private accounts for investment in stocks, bonds, and/or mutual funds.
• Plan II: Up to four percent of taxable wages, up to a maximum of $1000, could be diverted from FICA and voluntarily placed by workers into private accounts for investment.
• Plan III: One percent of wages on top of FICA, and 2.5 percent diverted from FICA up to a maximum of $1000, could be voluntarily placed by workers into private accounts for investment [13].

In Bush's 2005 State of the Union speech, which sparked the current debate, it was Plan II of CSSS's report that he outlined as the starting point for changes in Social Security (see "Bush's proposal" section below).

Other proposals

A range of other proposals have been suggested for partial privatization. One, suggested by a number of Republican candidates during the 2000 elections, would set aside an initially small but increasing percentage of each worker's payroll tax into a 'lockbox', which the worker would be allowed to invest in securities. Another eliminated the Social Security payroll tax completely for workers born after a certain date, and allowed workers of different ages different periods of time during which they could opt to not pay the payroll tax, in exchange for a proportional delay in their receipt of payouts.

Both wholesale and partial privatization pose questions such as: 1) How much added risk will workers bear compared to the risks they face under current system? 2) What are the potential rewards? and 3) What happens at retirement to workers whose privatized risks turn out badly?

Pros and cons of privatization

Generally, privatization advocates believe that individuals are the best decision makers about how much risk they should undertake with their own retirement funds. Stabilization proponents (see 'Stabilization' section below) counter that if those risks turn out badly, a political push by the same individuals to raise state benefits will be all but inevitable, which means that the risks such individuals may be willing to take under a privatized system are not without moral hazard. In law and economics, moral hazard is the name given to the risk that one party to a contract can change their behaviour to the detriment of the other party once the contract has been concluded. ...

Supporters of the current system maintain that its combination of low risks and low management costs, along with its social insurance provisions, work well for what the system was designed to provide: a baseline income for citizens derived from savings. From their perspective, the major deficiency of any privatization scheme is risk. Like any private investments, PRAs could fail to produce any return, and could even suffer a reduction in principal. In common usage, saving generally means putting money aside, for example, by putting money in the bank or investing in a pension plan. ...

Advocates of privatization have long criticized Social Security for lower returns than the returns available from other investments, and cite numbers based on historical performance. The Heritage Foundation, a conservative think tank, calculates that a 40 year old male with an income just under $60,000, will contribute $284,360 in payroll taxes to the Trust Fund over his working life, and can expect to receive $2208 per month under the current program. They claim that the same 40 year old male, investing the same $284,360 equally weighted into treasuries and high-grade corporate bonds over his working life, would own a PRA at retirement worth $904,982 and paying an annuity of up to $7372 per month. Furthermore, they argue that the "efficiency" of the system should be measured not by costs as a percent of assets, but by returns after expenses (e.g. a 6% return reduced by 2% expenses would be preferable to a 3% return reduced by 1% expenses). [14]

Supporters of the current system argue that the long-term trend of U.S. securities markets cannot safely be extrapolated forward, because stock prices relative to earnings are already at very high levels by historical standards. They add that an exclusive focus on long-term trends would ignore the increased risks that privatization would incur. The general upward trend has been punctuated by severe downturns. Critics of privatization point out that workers attempting to retire during any future such downturns, even if they prove to be temporary, will be placed at a severe disadvantage.

They also point out that, even conceding for sake of argument that such numbers are true, they fail to count what the transition will cost the country as a whole. Gary Thayer, chief economist for A.G. Edwards, has been cited in the mainstream media saying that the cost of privatizing -- estimated by some at $1 trillion to $2 trillion -- would worsen the federal budget deficit in the short term, and "That's not something I think the credit markets would appreciate."[15] If, as in some plans, the interest expenditure on this debt is recaptured from the private accounts before any gains are available to the workers, then the net benefit could be small or nonexistent. And this is really a key to understanding the debate, because if, on the other hand, a system which mandated investment of all assets in U.S. Treasuries resulted in a positive net recapturing, this would illustrate that the captive nature of the system results in benefits that are lower than if it merely allowed investment in U.S. Treasuries (purported to be the safest investment on Earth, probably safer than Social Security given the general taxing powers of the federal government).

Meanwhile some investment-minded observers among those who do not support privatization, point out potential pitfalls to the Trust Fund's undiversified portfolio, containing only treasuries. Many of these support the government itself investing the Trust Fund into other securities, to help boost the system's overall soundness through diversification, in a plan similar to CALPERS in the state of California. Diversification - Wikipedia /**/ @import /skins/monobook/IE50Fixes. ... CalPERS stands for the California Public Employees Retirement System. ... State nickname: The Golden State Other U.S. States Capital Sacramento Largest city Los Angeles Governor Arnold Schwarzenegger Official languages English Area 410,000 km² (3rd)  - Land 404,298 km²  - Water 20,047 km² (4. ...

There are also substantive issues that do not involve economics, but rather the role of government. Conservative Nobel Prize-winning economist Gary S. Becker, currently a graduate professor at the University of Chicago, wrote in a February 15, 2005 (PDF) article that "[privatization] reduce[s] the role of government in determining retirement ages and incomes, and improve[s] government accounting of revenues and spending obligations." He compares the privatization of Social Security to the privatization of the steel industry, citing similar "excellent reasons." Gary Stanley Becker (born December 2, 1930) is an American economist. ... The University of Chicago is a private co-educational university located in Chicago, Illinois. ... Steel framework Steel is a metal alloy whose major component is iron, with carbon being the primary alloying material. ...

Management costs of privatization

Oppenents of privatization also decry the increased management costs that any privatized system will incur. In Chile and the United Kingdom, as much as 30% of savings are reportedly being absorbed by fees. Since the U.S. system is passively managed -- with no specific funds being tied to specific investments within individual accounts, and with the system's surpluses being automatically invested only in treasuries -- its management costs are very low.

Advocates of privatization at the Cato Institute, a libertarian think tank, counter that, "Based on existing private pension plans, it appears reasonable to assume that the costs of administering a well-run system of PRAs might be anywhere from a low of roughly 15 basis points (0.15%) to a high of roughly 50 basis points (0.5%)."[16] They also point to the low costs of index funds (funds whose value rises or falls according to a particular financial index), including an S&P 500 index fund whose management fees run between 8 basis point (0.08%) and 10 basis points (0.10%).[17] An index fund is a type of passively managed mutual fund that seeks to track the performance of a benchmark market index such as the S&P 500. ... The S&P 500 is a list of 500 US corporations, ordered by market capitalization. ...

A Windfall for Wall Street?

Opponents also claim that privatization will bring a windfall for Wall Street brokerages and mutual fund companies, who will rake in billions of dollars in management fees.

Austan Goolsbee at the University of Chicago has written a study, "The Fees of Private Accounts and the Impact of Social Security Privatization on Financial Managers," which calculates that, "Under Plan II of the President's Commission to Strengthen Social Security (CSSS), the net present value (NPV) of such payments would be $940 billion," and, "amounts to about one-quarter (25%) of the NPV of the revenue of the entire financial sector for the next 75 years," and concludes that, "The fees would be the largest windfall gain in American financial history." [18] Other analysts argue that dangers of a Wall Street windfall of such magnitude are being vastly overstated. Rob Mills, vice president of the brokerage industry trade group Securities Industry Association, in a report published in December 2004, calculates that the proposed private accounts might generate $39 billion in fees, in NPV terms, over the next 75 years. This amount would represent only 1.2% of the sector's projected NPV revenues of $3.3 trillion over that timeframe. He concludes that privatization is "hardly likely to be a bonanza for Wall Street."[19] At the same time the conservative watchdogs at FactCheck.org estimate that the financial management sector will receive only 0.05% and 0.27% of its total revenues from fees on PRAs.[20] The University of Chicago is a private co-educational university located in Chicago, Illinois. ... FactCheck. ...

Nevertheless, Goolsbee's study has been deemed damaging enough at the Heritage Foundation that they have produced their own study, written by David C. John, specifically to counter Goolsbee.[21]

A Ponzi scheme?

Libertarians commonly criticize Social Security'a pay-as-you-go funding as being closer to an illegal Ponzi scheme -- where investors are paid off out of the funds collected from more investors, instead of out of profits from business activity -- than it is to a Trust Fund.[22] William G. Shipman of the Cato Institute argues: This article deals with the libertarianism as defined in America and several other nations. ... A Ponzi scheme is a fraudulent investment operation that involves paying returns to investors out of the money raised from subsequent investors, rather than from profits generated by any real business. ...

In common usage a trust fund is an estate of money and securities held in trust for its beneficiaries. The Social Security Trust Fund is quite different. It is an accounting of the difference between tax and benefit flows. When taxes exceed benefits, the federal government lends itself the excess in return for an interest-paying bond, an IOU that it issues to itself. The government then spends its new funds on unrelated projects such as bridge repairs, defense, or food stamps. The funds are not invested for the benefit of present or future retirees.[23]

This criticism is not new. In his 1936 presidential campaign, Republican Alf Landon called the Trust Fund "a cruel hoax". The Republican platform that year stated, "The so-called reserve fund . . . is no reserve at all, because the fund will contain nothing but the government's promise to pay." [24] Defenders of pay-as-you-go respond that the system is a Ponzi scheme only if the United States intends to repudiate its debts. On the occasions when the Social Security Administration has needed to redeem some of those securities, they have always been honored. Although Social Security benefits to future retirees do not represent debt in the legal sense (Fleming v. Nestor, 1960), the treasuries held by the Trust Fund do. The Social Security Administration, while noting the "superficial analogy between pyramid or Ponzi schemes and pay-as-you-go insurance programs," describes the latter as "a simple pipeline" that "could be sustained forever . . . [i]f the demographics of the population were stable". [25] An IOU (from the phrase I owe you) is a promise of money, goods, services, or other items of value, and may be either written or verbal. ... Presidential electoral votes by state. ... Alfred M. Landon Alfred Mossman Alf Landon (September 9, 1887 – October 12, 1987) was an American Republican politician from Kansas, notable nationally for his 1936 nomination as the Republican opponent of Franklin D. Roosevelt. ...

Proponents claim that a privatized system would open up new funds for investment in the economy, and would produce real growth. They claim that the treasuries held in the current Trust Fund are covering consumption rather than investments, and that their value rests solely upon the continued ability of the U.S. government to impose taxes. Opponents respond that there would be no net new funds for investment, because any money diverted into private accounts would produce a dollar-for-dollar increase in the federal government's borrowing from other sources to cover its general deficit.

Stabilization

The other major sector of opinion is that privatization accomplishes nothing, that rational investors would neutralize any benefit of, effectively, selling Treasury Notes and buying equities (see Modigliani-Miller Theory) - that it places more risk on individual workers than it gives back in rewards, since they cannot effectively vote their shares, but have no more protection than any other owner of common stock - and that it does nothing to change the budget situation in the future, that if and when the trust fund runs out, there will still be the choice of raising taxes or cutting benefits, or both. The Modigliani-Miller theorem (of Franco Modigliani and Merton Miller) forms the basis for modern thinking on capital structure. ...

The Trust Fund, under current law (blue) and under privatization (red) as per "Model 2" considered in the 2001 commission report. (Graph from "Social Security Trust Fund" by zFacts.com)

Believers in this position argue that "privatization" is a fraud, that there is no specific Social Security crisis, but instead a general budget crisis: namely that the federal government outside of Social Security is already in persistent deficit, that revenues are far too low to cover expenditures, and that absent this problem being solved, it does not matter how social security is set up. Image description: Graph showing depletion of the Social Security Trust Fund, under current law and under the system of private accounts described in Model 2 of the Report of the Presidents Commission to Strengthen Social Security, December 21, 2001 (see the Commissions Report, pp. ... Image description: Graph showing depletion of the Social Security Trust Fund, under current law and under the system of private accounts described in Model 2 of the Report of the Presidents Commission to Strengthen Social Security, December 21, 2001 (see the Commissions Report, pp. ...

Stabilization advocates say that the projected "deficits" in Social Security are identical to the "prescription drug benefit" enacted in 2002. They say that demographic and revenue projections might turn out to be too pessimistic--and that the current health of the economy exceeds the assumptions used by the Social Security Administration.

Stabilization advocates argue that the correct plan is to fix Medicare, which is the largest underfunded entitlement, repeal the 2001-2004 revenue reductions, balance the budget, and then, when a growth trendline emerges from these steps, alter the Social Security mix of taxes, benefits, benefit adjustments and retirement age to avoid future deficits. The age at which one begins to receive Social Security benefits has been raised several times since the program's inception.

Bush's 2001 advisory board discussed ways that the system could be adjusted to deal with the projected future deficit without privatization. For example, the income subject to Social Security taxation is capped, with the result that people with higher incomes pay a lower percentage tax than do people with lower incomes. Eliminating the cap would remove this regressive tax feature and would reduce or eliminate the projected deficit. The commission stated: A regressive tax is a tax which takes a larger percentage of income from people whose income is low. ...

Making all earnings covered by Social Security subject to the payroll tax beginning in 2002, but retaining the current law limit for benefit computations (in effect removing the link between earnings and benefits at higher earnings levels), would eliminate the deficit. If benefits were to be paid on the additional earnings, 88 percent of the deficit would be eliminated. (Social Security Advisory Board report, July 2001 (rev. ed.), p. 23)

Stabilization advocates argue that when the risks, overhead costs and borrowing costs of any "privatization" plan are taken together, the result is that such a plan has a lower expected rate of return than "pay as you go" systems. They point out the high overheads of "privatized" plans in England and Chile, and that while "risk for reward" applies to the individual, the macro picture means that for every winner, there will be losers, and the government will be responsible for preventing those losers from slipping into poverty. This will mean an increase in expenditures for anti-poverty programs for the elderly, as it has for both Chile and Argentina.

Plans such as the Diamond-Orszag plan propose stabilization of Social Security, by gradually ending the process by which the general fund has been borrowing from payroll taxes. This requires increased revenues devoted to Social Security. Their plan, as with several other Social Security stabilization plans, relies on gradually increasing the retirement age, raising the ceiling on which people must pay FICA taxes, and slowly increasing the FICA tax rate to a peak of 15% total from the current 12.4%.

Bush's proposal

On February 2, 2005, Bush made Social Security a prominent theme of his State of the Union Address. He outlined, in general terms, a proposal based on partial privatization. After a phase-in period, workers currently less than 55 years old would have the option to set aside four percentage points of their payroll taxes in individual accounts that could be invested in the private sector, in "a conservative mix of bonds and stock funds". Workers making such a choice might receive larger or smaller benefits than if they had not done so, depending on the performance of the investments they selected. February 2 is the 33rd day of the year in the Gregorian Calendar. ... 2005 is a common year starting on Saturday of the Gregorian calendar and is the current year. ... Alternative meanings in State of the Union (disambiguation) The State of the Union Address is an annual event in which the President of the United States reports on the status of the country, normally to a joint session of the U.S. Congress (the House of Representatives and the Senate). ...

Although Bush described the Social Security system as "headed for bankruptcy", his proposal would not affect the projected shortfall in Social Security tax receipts. Partial privatization would mean that some workers would pay less into the system's general fund and receive less back from it. Administration officials said that the proposal would have a "net neutral effect" on the system's financial situation, and that Bush would discuss with Congress how to fill the projected shortfall. [26] The Congressional Budget Office had previously analyzed the commission's "Plan II" (the plan most similar to Bush's proposal) and had concluded that the individual accounts would have little or no overall effect on the system's solvency, and that virtually all the savings would come instead from changing the benefits formula. [27]

As illustrated by the CBO analysis, one possible approach to the shortfall would be benefit cuts that would affect all retirees, not just those choosing the private accounts. Bush alluded to this option, mentioning some suggestions that he linked to various former Democratic officeholders. He did not endorse any specific benefit cuts himself, however. He said only, "All these ideas are on the table." He expressed his opposition to any increase in Social Security taxes. Later that month, his press secretary, Scott McClellan, did not unambiguously characterize raising or eliminating the cap on income subject to the tax as a tax increase that Bush would oppose. [28] Scott McClellan Scott McClellan (born 1968) is the current White House Press Secretary for President George W. Bush. ...

In his speech, Bush did not address the issue of how the system would continue to provide benefits for current and near-future retirees if some of the incoming Social Security tax receipts were to be diverted into private accounts. A few days later, however, Vice President Dick Cheney stated that the plan would require borrowing $758 billion over the period 2005-2014; that estimate has been criticized as being unrealistically low. [29]. The Vice President of the United States is the second-highest executive official of the United States government, the person who is a heartbeat from the presidency. As first in the presidential line of succession, the Vice President becomes the new President of the United States upon the death, resignation... Richard Bruce Cheney (born January 30, 1941), widely known as Dick Cheney, is an American politician and businessman affiliated with the U.S. Republican Party. ...

On April 28, 2005, Bush held a televised press conference at which he provided additional detail about the proposal he favored. For the first time, he endorsed reducing the benefits that some retirees would receive. April 28 is the 118th day of the year (119th in leap years) in the Gregorian Calendar, with 247 days remaining. ...

The current system sets the initial benefit level based on the retiree's past wages. Each past year's wage amount is brought forward to the year of retirement by being increased according to average wage growth in the interim, so that the retiree is credited with what a comparable wage would be at the time of retirement. The benefit level is based on the 35 highest years.

One mechanism that had been suggested for reducing expenses is to replace this wage indexing with price indexing. Initial benefits would be lower if the past wages were brought forward based on the changes in the consumer price index, which tends to grow more slowly than average wages. Bush endorsed a version of this approach suggested by financier Robert Pozen, called "progressive indexing", which would mix price and wage indexing in setting the initial benefit level. The "progressive" feature is that the less generous price indexing would be used in greater proportion for retirees with higher incomes. The San Francisco Chronicle gave this explanation: Financier (IPA: /ˌfi nãn ˈsjei/) is an elegant term for a person who handles large sums of money, usually involving money lending, financing projects, large-scale investing, or large-scale money management. ... Robert Pozen is an economist that over the years has worked as a visiting professor at Harvard Law School, as the head of Fidelity Investments, and on several political projects for Republicans, including George W. Bushs 2001 Social Security commission. ...

Under Pozen's plan, which is likely to be significantly altered even if the concept remains in legislation, all workers who earn more than about $25,000 a year would receive some benefit cuts. For example, those who retire in 50 years while earning about $36,500 a year would see their benefits reduced by 20 percent from the benefits promised under the current plan. Those who earn $90,000 -- the maximum income in 2005 for payroll taxes -- and retire in 2055 would see their benefits cut 37 percent. [30]

As under the current system, all retirees would have their initial benefit amount adjusted periodically for price inflation occurring after their retirement. Thus, the purchasing power of the monthly benefit level would be frozen, as it is now.

Substance of the dispute over Bush's proposal

Although Bush's State of the Union speech left many important aspects of his proposal unspecified, debate began on the basis of the broad outline he had given. Opponents argued that the plan would result in high transition costs, with the midline estimates to be in the vicinity of over $2 trillion over 10 years. For workers, privatization would mean smaller social security checks, with the likelihood based on historical returns of increased compensation from returns on investments. There is debate over the advisability of subjecting workers' retirement money to market risks.

Bush's proposal, according to its supporters, would compensate young future retirees for needed cuts in money spent on benefits in the future, and thus spare a "crisis" in Social Security, which would occur when it exhausts its "trust fund" surplus in 2042, according to the SSA or 2052, according to the CBO. Each worker's benefit would be the combination of a minimum guaranteed benefit and the return on the private account. The proponents' argument is that high returns and ownership of the private accounts would allow lower spending on the guaranteed benefit, but possibly without any net loss of income to beneficiaries. The savings to the government would come through a mechanism called a "clawback", where profits from private account investment would be taxed, or a benefit reduction meaning that individuals whose accounts underperformed the market would receive less than current benefit schedules, although, even in this instance, the heirs of those who die early could receive increased benefits even if the accounts underperformed historical returns. Proponents of privatization argue that Social Security is headed for "bankruptcy" and therefore benefits are on a path to be reduced anyway when the "trust fund" is expended. Finally, they argue that private accounts have the added benefit of being politically and morally more difficult to take away than mere transfer payments, if the overburdened labor force of the future exerts political pressure for relief.

Opponents, citing the CBO analysis, argue that the upfront borrowing costs mean that this plan would not produce a lower total deficit in the Social Security fund against current law until around 2030. The expected savings projected do not include interest on this debt nor the benefit of paying back the debt in cheaper (inflated) dollars, nor is the expected borrowing figured into their GDP and productivity assumptions in the model. Opponents also dispute the economic projections used, pointing out that they require low economic growth, and still have high stock market returns, which would require that stock price/earnings ratios reach historically unsustainable levels of 70, or corporate earnings/revenue ratios to triple over the course of the next 70 years. Neither of these events has happened in the course of modern economic history, and therefore, they argue, the projections that are used to support the plausibility of the privatization plans are contradictory.

Politics of the dispute over Bush's proposal

The political heat has been turned up on the issue ever since Bush mentioned changing Social Security during the 2004 elections, and since he made it clear in his nationally televised January speech that he intends to work to partially privatize the system during his second term. Presidential electoral votes by state. ...

• To assist the effort Republican donors were asked after the election to help raise $50 million or more for a campaign in support of the proposal, with contributions expected from such sources as the conservative Club for Growth and the securities industry. [31] (In 1983, a Cato Institute paper had noted that privatization would require "mobilizing the various coalitions that stand to benefit from the change, ... the business community, and financial institutions in particular ..." [32]

Soon after Bush's State of the Union speech, the Club for Growth began running television advertisements in the districts of Republican members of Congress whom it identified as undecided on the issue. [33]

• On January 16, 2005, the New York Times reported internal Social Security Administration documents directing employees to disseminate the message that "Social Security's long-term financing problems are serious and need to be addressed soon," and to "insert solvency messages in all Social Security publications". [34]

Coming soon after the disclosure of government payments to commentator Armstrong Williams to promote the No Child Left Behind Act, the revelation prompted the objection from Dana C. Duggins, a vice president of the Social Security Council of the American Federation of Government Employees, that "Trust fund dollars should not be used to promote a political agenda." The Republican Party, often called the GOP (for Grand Old Party, although one early citation described it as the Gallant Old Party) [1], is one of the two major political parties in the United States. ... The Club for Growth is a political action committee that advocates supply-side economics. ... January 16 is the 16th day of the year in the Gregorian Calendar. ... The New York Times is an internationally known daily newspaper published in New York City and distributed in the United States and many other nations worldwide. ... Armstrong Williams (born February 5, 1959) is an African American political commentator. ... Signing ceremony at Hamilton High School in Hamilton, Ohio. ... The American Federation of Government Employees is an American labor union representing over 600,000 employees of the federal government. ...

In the weeks following his State of the Union speech, Bush devoted considerable time and energy to campaigning for privatization. He held "town meetings" at many locations around the country. Attendance at these meetings was controlled to ensure that the crowds would be supportive of Bush's plan. In Denver, for example, three people who had obtained tickets through Representative Bob Beauprez, a Republican, were nevertheless ejected from the meeting before Bush appeared, because they had arrived at the event in a car with a bumper sticker reading "No More Blood for Oil". [35] Colorado State Capitol Building City nickname: The Mile-High City Location of Denver in Colorado City-County Denver (coextensive) Mayor John Hickenlooper (D) Area   â€“Land   â€“Water 154. ... Bob Beauprez (born September 22, American politician, has been a Republican member of the United States House of Representatives since 2003, representing the 7th District of Colorado. ...

• Opponents of Bush's plan have analogized his dire predictions about Social Security to similar statements that he made to muster support for the 2003 Invasion of Iraq; see, for example, this advertisement (80k external PDF file).

• A dispute between the American Association of Retired Persons and a conservative group for older Americans, USA Next, cropped up around the time of the State of the Union speech. The AARP had supported Bush's plan for major changes in Medicare in 2003, but it opposed his Social Security privatization initiative. In January 2005, before the State of the Union Address, the AARP ran advertisements attacking the idea. In response, USA Next launched a campaign against AARP. Charlie Jarvis of USA Next stated: "They [AARP] are the boulder in the middle of the highway to personal savings accounts. We will be the dynamite that removes them." [36]

The tone of the debate between these two interest groups is merely one example among many of the tone of many of the debates, discussions, columns, advertisements, articles, letters, and white papers that Bush's proposal, to touch the "third rail," has sparked among politicians, pundits, thinktankers, and taxpayers. The 2003 invasion of Iraq, also called the Iraq War or Operation Iraqi Freedom, began March 20, 2003, initiated by the United States, the United Kingdom and a loosely-defined coalition. ... AARP is the name of the United States non-profit organization formerly known as the American Association of Retired Persons. ... Conservatism or political conservatism is any of several historically related political philosophies or political ideologies. ... USA Next is a United States lobbyist group whose slogan is Building a Legacy of Freedom for Americas Families. It presents itself as a conservative senior citizens organization, although the number of members it has has been challenged. ... There are several publicly funded health services in various countries called Medicare: Medicare (Canada) is a comprehensive, universal (for all the citizens and permanent residents in the country) public health financing system. ... Generally speaking, advertising is the paid promotion of goods, services, companies and ideas by an identified sponsor. ... A white paper is a government report outlining policy or authoritative report on a major issue. ...

Some of the critics of Bush's plan argued that its real purpose was not to save the current Social Security system, but to lay the groundwork for dismantling it. They note that, in 2000, when Bush was asked about a possible transition to a fully privatized system, he replied: "It's going to take a while to transition to a system where personal savings accounts are the predominant part of the investment vehicle. ... This is a step toward a completely different world, and an important step." [37] His comment is consonant with the Cato Institute's reference in 1983 to a "Leninist strategy" for "guerrilla warfare against both the current Social Security system and the coalition that supports it." [38] Vladimir Ilyich Lenin (Russian: Влади́мир Ильи́ч Ле́нин  listen?), original surname Ulyanov (Улья́нов) (April 22 (April 10 (O.S.)), 1870 – January 21, 1924), was a Russian revolutionary, the leader of the Bolshevik party, the first Premier of the Soviet Union, and the founder of the ideology of Leninism, later expanded into Marxism-Leninism by Joseph... Guerrilla (also called a partisan) is a term borrowed from Spanish (from guerra meaning war) used to describe small combat groups. ...

Immediately after Bush's State of the Union speech, a national poll brought some good news for each side of the controversy. [39] Only 17% of the respondents thought the Social Security system was "in a state of crisis", but 55% thought it had "major problems". The general idea of allowing private investments was favored by 40% and opposed by 55%. Specific proposals that received more support than opposition (in each case by about a two-to-one ratio) were "Limiting benefits for wealthy retirees" and "Requiring higher income workers to pay Social Security taxes on ALL of their wages". The poll was conducted by USA Today, CNN, and the Gallup Organization. USA Today is a national American newspaper published by the Gannett Corporation. ... CNN or Cable News Network is a cable television network that was founded in 1980 by Ted Turner & Reese Schonfeld [1] [2] (although he currently is not recognized in CNNs official history). ... A Gallup Poll is an opinion poll frequently used by the mass media for representing public opinion. ...

Bush's April press conference, in which for the first time he expressly endorsed benefit reductions, sparked disagreement about where the burden would fall. Bush referred to "people who are better off". [40] Many media summaries accepted the characterization that "wealthy" retirees would be affected, and that benefits for lower-income people would grow. [41] Opponents countered that middle-class retirees would also experience cuts, and that those below the poverty line would receive only what they are entitled to under current law. [42] Democrats also expressed concern that a Social Security system that primarily benefited the poor would have less widespread political support. [43] Finally, the issue of private accounts continued to be a divisive one. Many legislators remained opposed or dubious, while Bush, in his press conference, said he felt strongly about the point.

It has been suggested that "even without broad Congressional or public support, President Bush just may... enact his private accounts idea... [b]y executive order" as he did with his faith based initiative, parts of the war on terror, and relaxation of business regulations. [44] The war on terrorism or war on terror (abbreviated in U.S. policy circles as GWOT for Global War on Terror) is an effort by the governments of the United States and its principal allies to destroy groups deemed to be terrorist (primarily radical Islamist organizations such as al-Qaeda...

Despite Bush's emphasis on the issue, many Republicans in Congress were not enthusiastic about his proposal. In late May, House Majority Whip Roy Blunt listed the "priority legislation" to be acted on after Memorial Day; Social Security was not included. [45] The Majority Whip is an elected member of the U.S. House of Representatives who assists the Speaker of the House and the Majority Leader to coordinate ideas on and garner support for proposed legislation. ... Roy D. Blunt (born January 10, 1950) is a Representative to the United States House of Representatives from the 7th Congressional District of Missouri, and the current House Majority Whip. ... Relatives and others traditionally place flags near veterans headstones on Memorial Day Memorial Day is a United States public holiday that takes place on the last Monday of May. ...

See also

• Social Security (United States) for both information about the program, as it currently exists, and historical information about the creation of the program in the mid 1930's and the controversies at that time.

Social Security in the United States is a social insurance program funded through a dedicated payroll tax. ...

External links

Articles

• Retiring in Chile - The New York Times, December 1 2004

• CommUnity of Minds : Working Together - The $44 Trillion Abyss - 2003 Fortune Magazine
• Social Security Suicide - AlterNet
• "The Fake Crisis" - Rolling Stone
• "What Does Price Indexing Mean for Social Security Benefits?" - from Center for Retirement Research, January, 2005 (explanation of wage indexing versus price indexing)
• "False Attacks Over 'Windfalls' to Wall Street" - from the University of Pennsylvania's FactCheck.org
• Getting a grip on Social Security: The flaw in the system

Rolling Stone is a music and music industry magazine. ... The University of Pennsylvania (commonly referred to as Penn or UPenn, although the former is the preferred and recognized nickname of the University) is a private university in Philadelphia, Pennsylvania and a member of the Ivy League. ... FactCheck. ...

Speeches

• President George W. Bush - State of the Union Address - February 2, 2005
  • "Bush's State of the Union: Social Security 'Bankruptcy?'" - FactCheck.org commentary on the speech
• FRB:Testimony, Greenspan--Economic outlook and current fiscal issues--February 25, 2004

Pro-privatization websites

• Be Not Afraid: Personal Accounts Are No Radical Idea - The American Enterprise - March 2005
• Cato Institute
• Heritage Foundation

Anti-privatization websites

• "Social Security Analyses" - Center on Budget and Policy Priorities
• Social Security: There is no crisis
• "Social Security & Medicare" - Center for Economic and Policy Research
• "EPI Issue Guide: Social Security" - Economic Policy Institute

Link directories

• Better World Links on the Social Security Debate