The retiree math war

Call it the battle of the bar graphs. To move Social Security reform through Congress, President Bush first has to convince voters that there is some urgency. With the clock ticking away on his second term, that needs to happen soon.

The opposition, including Democrats, labor unions, and America's largest retiree organization, has mounted its own numbers war. These groups argue that Social Security, the signature achievement of the New Deal, faces no crisis.

That's why Wednesday's release of the Social Security and Medicare Trustees' report was the most eagerly awaited event of the season. But the report gave the president some new fodder. Social Security's trust funds are expected to run out of money in 2041, a year earlier than was predicted a year ago. While it also shows a rise in "unfunded obligations," the report doesn't change a key obstacle for Bush: The debate on Social Security comes down to numbers that are nearly inscrutable to the American public - and ask young voters to consider a time horizon when they might be grandparents.

"The president is losing the fight over numbers, because if you have an argument in terms of $30 versus $40 trillion you're having an argument about numbers that no human being can comprehend," says Henry Aaron, a Brookings Institution expert on entitlement programs.

At the center of the battle over math are assumptions about economic growth, inflation, and demographic factors such as immigration and longevity.

Based on such assumptions by the trustees - which stir criticism from administration critics - this year's forecast turned downward. Over a 75-year period ahead, trustees say the program needs a revenue infusion of $4 trillion to pay all scheduled benefits. This unfunded obligation is $300 billion higher than the amount estimated last year.

When Medicare, the nation's other huge entitlement program, is added in, the problem multiplies: There's a $43 trillion gap between government's promised liabilities (mainly Social Security and Medicare), and the money it's expected to take in over the next 75 years, according to the Government Accountability Office.

The nation's fiscal path is "unsustainable," says David Walker, who was appointed by President Clinton to a 15-year term as head of the GAO.

To cover a shortfall that size, Washington would have to double payroll taxes, increase federal income taxes by up to 78 percent, or cut Social Security and Medicare benefits in half, according to economists Kent Smetters and Jagadeesh Gokhale, who studied the issue for the Treasury Department.

Critics say that such megatrillion scenarios are based on assumptions that are too pessimistic. "Not one person has an idea of what $43 trillion will be as a future share of GDP," says Dean Baker, codirector of the Center for Economic and Policy Research, which is advising opponents of the Bush plan.

Even slight changes in assumptions about economic growth, productivity, or immigration rates over that period would change estimates dramatically. "To say we've done some terrible wrong to our children because they're paying 2 percentage points more [a possible payroll-tax hike to cover Social Security's shortfall] but their wages are 80 percent higher ... so what? It's important for people to understand that this is a distant problem," says Mr. Baker.

For the Bush administration, it's critical to convince the public that the problem is not distant. There are two key dates in the numbers war: One is the date that the Social Security trust funds are exhausted - now slated as 2041 by trustees. By contrast, the Congressional Budget Office set the date at 2052 in its latest estimates in January 2005.

At a "town meeting" on social security issues in Bakersfield, Calif., on Monday, Vice President Cheney and Rep. Bill Thomas (R) of California said the key date is 2008. That's the year the first wave of babyboomers becomes eligible for early retirement. A majority of seniors who are eligible to retire do, he said.

"As soon as baby boomers start to retire, if we haven't addressed the problem, they become part of the problem, not the solution," said Representative Thomas, the chairman of the House Ways and Means Committee.

Another key debating point is the cost of delaying action. In town meetings and on the stump, President Bush and supporters say that the cost of one year's inaction is $600 billion. That estimate is based on a new measure of unfunded obligations over an infinite time period, first introduced in the Trustees 2003 Annual Report.

The $600 billion is derived from comparing future costs to future income over infinite horizons from year to year. It's a calculation "likely to mislead anyone lacking technical expertise ... into believing that the program is in far worse financial condition than is actually indicated," wrote the American Academy of Actuaries in a letter to the Trustees in December, 2003.

"The new trustees' report provides further evidence that Social Security more closely resembles a house with a leaking roof in need of repair than a house that is built on quicksand. Social Security will be able to pay 100 percent of promised benefits until 2041 (the year in which the trustees predict the trust fund will be exhausted) and most of promised benefits thereafter," says Robert Greenstein of the Center on Budget and Policy Priorities.

Moreover, nothing in the new report indicates that replacing part of Social Security with private accounts, as the administration has proposed, would speed the path toward solvency. In fact, because the President's proposal would shift large amounts of revenue out of Social Security, it would cause the trust fund to become exhausted about 11 years sooner, in 2030, unless it is coupled with large reductions in Social Security benefits.

In the end, the arbiters of the math wars will be the voting public. Polls signal mixed results. While President Bush hasn't made headway selling his goal of adding personal accounts within Social Security, two-thirds of Americans in a recent Washington Post/ABC News poll said the system needs major changes to avert a crisis. The latest Gallup poll shows that Social Security is cited by more Americans than the economy, health are, or terrorism as the most important domestic issue.