Tough choices loom on retirement security

Yesterday, a presidential commission met to finalize its "interim report" on Social Security, outlining challenges that lie ahead. The program provides bedrock financial support for 45 million Americans. For half of US retirees, it is all that stands between them and poverty.

It is hugely popular, but a great divide is building over how to fix a looming cash shortfall. This autumn, the commission is expected to propose that the fixes include private accounts, where individuals can use some of their Social Security to invest for their own retirement. But critics say the commission is "stacked" to favor privatization, and that simpler measures can close the coming gap.

How Social Security works now

Many Americans think the Social Security taxes they pay during their working years are deposited in some kind of personal bank account, earmarked for their own future Social Security retirement benefits.

That's not the way it works.

Every worker's Social Security payroll taxes are actually put into the same big money pot, and every retiree's benefits are paid out of it.

This pot, called the Social Security Trust Fund, also pays benefits for people with disabilities and their dependents, and for the spouses and children of workers who die at an early age.

Currently, under this "pay as you go" system, the trust fund is running a surplus.

The tax inflow outstrips the benefits that are currently owed.

The excess money sits in the trust fund, invested in federal bonds. Those bonds pay interest that adds still more money to the fund.

The problem

In 14 years or so, as the number of retirees grows relative to the number of workers, outflows from the trust fund will begin to outpace inflows.

By 2030, some 70 million Americans will be over 65, twice as many as today. The vast majority will be eligible for Social Security.

But for each Social Security recipient, there will then be only 2.1 workers to provide the money, down from today's 3.4 workers. That won't be enough taxpayers, most experts say, to keep the promised level of Social Security payments flowing to tomorrow's retirees.

"Something will have to be done," says political scientist Douglas Besharov. "Either dump a lot of money in, or modify the benefits."

Blueprints for repair

Ideas for reform abound, but each is controversial. Bush's central recommendation, a partial "privatization" in which people can contribute to individual accounts, is especially controversial.

Any changes will be gradual, to avoid affecting current retirees or those on the cusp of retirement. Here are some of the most frequently mentioned proposals:

* Raise the age at which retirees can collect full benefits. It is inching up from 65 to 67, a process that will take 24 years. Some say it should go higher still.

* Decrease the annual cost-of-living adjustment (COLA). Proponents say retirees' cost of living doesn't increase as fast as younger people's, so the COLA doesn't need to equal overall inflation. But advocates for the elderly, citing rising medical costs, argue for full COLAs.

* Raise Social Security taxes on high-income workers. This year, they pay the tax on their first $80,400 of earnings. One idea: Pay on the first $100,000. A more radical idea: Everyone should pay on everything they earn.

* Cut benefits for the very affluent. It's agreed they don't need the extra income. But the move would reduce popular support for Social Security.

Battle over individual accounts

The idea is to let workers divert part of their payroll tax into individual accounts. People would then pick among investments such as stock mutual funds. When they retire, the money would augment their government-issued Social Security checks.

Backers, including President Bush, say the growth of money in the stock market will provide more bang for each buck of Social Security tax. Initially, less money would be going into the trust fund, as dollars are diverted to individual accounts. But in the long run, the plan might allow Social Security to move, at least partially, from pay-as-you-go to a pre-funded system that needs less government involvement.

Critics note that stocks can go down as well as up - and individuals bear the risk. They argue it's far from certain that private accounts would help payroll-tax dollars go further.

In fact, today's workers would face "a double whammy," says economist Rudolph Penner, former head of the Congressional Budget Office. They would still pay 6.2 percent Social Security tax, perhaps diverting 2 percentage points of it to a private account. But the diverted money would widen the trust fund's future shortfall for paying retirees. Even if the government borrows to fill that gap, taxpayers would have to foot that bill, paying interest on the debt.

(c) Copyright 2001. The Christian Science Monitor