President Bush and Congress are quickly moving on efforts to privatize Social Security. President Bush is pushing a proposal that would partially privatize Social Security by allowing workers to set aside a portion of their Social Security payroll taxes into private retirement accounts. Proponents say private accounts would yield higher retirement income because the system is running out of money to pay the current level of benefits.
The League is firmly opposed to privatization. We are concerned that both current and future retirees could be hurt with lower benefit checks. For example, according to the Congressional Budget Office’s (CBO) review of the major proposal of a 2001 Bush-appointed Commission on Social Security, Social Security benefits would be reduced for holders of the new private accounts not only by the amount deposited into the private accounts, but would further be reduced by an additional amount that the government assumes private accounts would gain — regardless of whether the accounts actually gain value or not. The resulting lower Social Security benefits could off set much, if not all, of any gains, and some retirees whose private accounts did not perform well could wind up with even less.
In addition, the proposal would make significant changes to the benefit formula — changes similar to those that were made in 1977 that led to the Notch disparity. TSCL is concerned that the proposal to modify the benefit formula not only holds the potential for the creation of NEW generations of Notch Babies, but for deeper-than-necessary cuts in benefits that persist over many decades, as the following chart from the CBO’s analysis illustrates:
Source: Congressional Budget Office — Analysis of Plan 2 President’s Commission, Table 2, Middle Earnings
The left hand column in grey illustrates the “scheduled annual benefits” under current law. As workers retire in future decades, annual benefits rise over time. The right hand column shows the “proposed annual benefits one would receive with individual accounts.” Because of the change in the benefit formula there is a significant drop in benefits from those that are currently scheduled. Under this proposal, the drop covers not just ten years as it did for Notch Babies, but more than two decades of retirees. Benefits would slowly begin rising again starting with retirees born in the 1970’s. The reduction from currently scheduled benefits also would grow significantly deeper over time.
Current retirees also need to be concerned. Private Social Security accounts would take money out of the current pay-as-you-go system -- money that normally goes for paying benefits to current beneficiaries. According to the CBO, a significant drop in funds to pay benefits to current retirees would occur almost immediately. This is due in part because the proposals would become effective at the same time Baby Boomers begin to retire, which will start to occur in just three years. At that time, Social Security outlays will quickly begin to exceed revenues coming in. Under privatization, Social Security would run short of funds to pay benefits to current retirees even sooner than already projected.
TSCL is warning seniors of coming cuts that would be required to pay for privatization, and also warning Members of Congress about the potential of giving birth to new Notch Babies when Social Security is reformed. TSCL believes that Social Security financing needs to be addressed. Plans that would divert payroll taxes into private accounts, however, take revenues that will be needed to pay benefits to current retirees out of the system. There are other means to address the solvency problems. TSCL does support the use of individual retirement accounts in addition to Social Security.
Sources: “Analysis of Plan 2 of The President’s Commission on Social Security,” The Congressional Budget Office, July 21, 2004.
February 2005
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