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President George W. Bush
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Welcome to "Ask the White House" -- an online interactive forum where you can submit questions to Administration officials and friends of the White House. Visit the "Ask the White House" archives to read other discussions with White House officials.

Chuck Blahous
Special Assistant to the President for Economic Policy

April 5, 2005

Chuck Blahous
Hello and welcome to "Ask the White House." I am here to respond to your questions about the President's proposal to allow younger workers the voluntary opportunity to have personal accounts within the Social Security system. Past sessions of "Ask the White House" on this subject have produced especially interesting questions, and I expect that today's will do the same. I hope that you will find my answers to be helpful.

James, from Richmond writes:
Dear Mr. Blahous,If private accounts (like the government TSP) become available during social security reform, will all citizens in the U.S. have access to them? Or only certain people within the government like right now.

Thank you, James

Chuck Blahous
Thank you for your question, James. Currently, as you note, federal employees (like me) have the opportunity to invest in personal accounts. We are permitted to save a portion of each paycheck in personal accounts that enable us to build nest eggs for our retirement. The system works very well. We are allowed to invest our contributions in a small number of conservative, broadly diversified funds of bonds and stocks. No special financial knowledge is required for federal employees to enjoy the benefits of prudent, long-term savings and investment.

The President wants Americans who participate in the Social Security system to enjoy a similar opportunity to build a nest egg for retirement. These personal accounts would be purely voluntary. The accounts would not be limited to government employees, but would be available to everyone born in 1950 or later who pays into the Social Security system.

Matthew, from Chicago writes:
Mr. Blahous,I have heard something about counties within different states (maybe Texas? I'm not sure) that "opted out" of Social Security. What exactly does that mean and does that have anything to do with IOU's?


Chuck Blahous
Matthew, you are correct that many state and local government employees are exempt from the Social Security system. The example of which you heard might have been the system in Galveston, Texas, which has received some attention in the press. But Galveston is not the only example. There are many other examples in states such as California, Ohio, Massachusetts and others.

Employees in these plans do not pay taxes into our national Social Security system, but rather to different, locally designed retirement plans. In some of these plans, workers are given the opportunity to invest their contributions in personal accounts, an opportunity the President wants to extend to workers covered under Social Security.

The specific details vary from plan to plan, but there is an important lesson that can be learned from them. Personal accounts are not an untried, untested concept. Already in many places around the country, we see that they are administratively feasible and fiscally responsible.

Ralph, from Dayton, Ohio writes:
According to the final report of the Commission to Strengthen Social Security, the members came up with three reform models. Which one of these models has been selected to privatize Social Security?

Chuck Blahous
Ralph, President Bush’s Commission to Strengthen Social Security did not advocate, nor does President Bush, the privatization of Social Security. President Bush believes that Social Security should continue to be operated as it always has by the federal government. Today’s seniors, and those nearing retirement, would not experience any change in their Social Security. Younger workers who do not choose a personal account would receive all of their benefits from the federally administered Social Security system.

Even those younger workers who take the voluntary opportunity to have a personal account would not participate in a “privatized” system. The accounts would be administered in a system similar to the personal accounts now enjoyed by federal employees.

The President’s Commission, as you note, produced three reform models for strengthening Social Security. The President has not designated one of these as his own. He has instead expressed a desire to work with Congress to find the best way to fix Social Security, and has commended many of the ideas put forth in the Commission proposals, and in the proposals of Members of Congress.

Vincent, from Springfield, Ohio writes:
How exactly will the personal accounts help people gain more benefits?

Chuck Blahous
Personal accounts enable workers to gain more benefits by enabling them to receive the gains of sound, long-term investing.

Under the President’s proposal, individuals would have the opportunity to invest in a blend of conservative bonds and stocks. If the individual decides to invest solely in the lowest-risk fund of government bonds, similar to those now held by the Social Security Trust Fund, he or she will receive total benefits similar to those (s)he would have received if (s)he stayed in the traditional Social Security system. If the individual chooses to invest in stock funds, the higher, long-term returns from stock investments would increase his/her expected benefits. Stock returns are not “guaranteed,” as you may know, but there is no period in American history where they have failed to produce returns, over a full working lifetime--well above the return on government bonds. The Social Security actuary’s projections, therefore, are that the net effect of the personal accounts will be to increase the benefits that workers expect from Social Security.

Ira, from Kirkland, WA writes:
Mr. Blahous, why do we need an expensive new federal program when there are existing options for investing in securities? The Roth IRA is a perfect instrument for investors who are looking to enhancing their retirement savings. Thank you.

Chuck Blahous
Ira, the President has not proposed a new federal program, nor to increase the costs of existing Social Security. You may have heard of other proposals for “add-on” personal accounts in addition to Social Security, but this is not what the President has proposed. The personal accounts that the President has proposed would be fiscally responsible because they would be used to fund retirement benefit obligations that would exist under the current system.

Under the President’s proposal, workers would have the choice to invest some of their payroll taxes, and thus receive some of their future benefits, from the personal account instead of from the traditional Social Security system. This choice would reduce the future obligations of the Social Security system at the same time the money is contributed to the account. This is why the President’s approach is a fiscally responsible one.

The Roth IRA is indeed an important tool for retirement saving for many Americans. There are millions of Americans, however, who do not have additional money to put aside in savings, once their 12.4% Social Security payroll tax has been collected. For these Americans, the opportunity to build a nest egg in a Social Security personal account may be the only such opportunity that they have.

Brian, from Dyer, IN writes:
I am 23 years old young adult worried about Social Security. Why is it that our grandparents and our older friends do not have to worry about losing their benefits, but younger generations like me do. Shouldn't we worry about older and younger Americans at the same time so that way we can both receive the benefits?

Chuck Blahous
Brian, thank you for your question and for your concern about the future of Social Security.

The main difference between your situation, and that of today’s seniors, is that today’s seniors have already paid a lifetime of taxes into the Social Security program and have been counting on the benefits they have been promised. If there were a change to their benefits, they would not have the same opportunity to adjust, and to find another source of income.

You still have most of your working career ahead of you. You haven’t yet paid most of the taxes that you will pay into Social Security, and you also haven’t accrued most of the benefits that you will accrue. If we didn’t change how Social Security now works, there would be an unsustainable gap between the benefits that you would be promised, and the money available to pay those benefits. That’s why we need to develop a new opportunity for you, to establish a sustainable relationship between the system’s revenues and its benefit promises, and to give you the opportunity to build a nest egg for retirement that maximizes the benefits that you can receive.

Chris, from St. Louis Missouri writes:
I am thirty years old. When I retire, far in the future, what will happen to the money that I have already put in?

Chuck Blahous
Chris, under the current system, most of the money that you pay is immediately used to pay benefits for today’s seniors. There is a small amount left over, and that amount is made available to the federal government to spend on other programs. The Social Security system doesn’t save any of your money, but rather only keeps track of your personal wage history. Under the current system, when you retire, the government must then find the money to pay your benefits by taxing the workers of that time. No money is actually saved.

This is the way that Social Security has worked for decades. It can work well in a time like 1950, when there were sixteen workers to support each person on Social Security. But by the time you are in retirement, there will be only two workers to support each person on Social Security. It takes a lot more effort for two people to lift another person up than it does for sixteen people to do it. That is why Social Security must change.

Under the President’s plan for Social Security, you would have the opportunity to put aside some of your payroll taxes in a personal account, instead of those taxes all being spent by the federal government. That way, when you retire, you will have a nest egg of your own, and can receive benefits based on your own savings, instead of only on the taxes paid by future workers.

Kara, from Repblic Mo writes:
Why do we have the social secity system?

Chuck Blahous
Kara, this is an excellent question. As we discuss how best to strengthen Social Security, it is important to remember why Social Security is there.

The Social Security system exists to protect people from income loss due to such life events as retirement, a period of disability, or by being a household survivor of a wage-earner who passes away.

The system was designed to be very different from welfare or other forms of means-tested assistance: Americans of all wage levels, rich or poor, pay into the system, and receive benefits from it.

Equally importantly, Social Security has its own separate financing system. The payroll taxes collected for Social Security are required to be adequate to fund the system’s benefits, without the system drawing funds from the general budget. The system’s creators, including President Franklin D. Roosevelt, designed the Social Security program to stand on its own.

Unfortunately, the designers of Social Security did not anticipate how different America would be in the 21st century. In 1950, there were sixteen workers paying into the system to support each person receiving benefits. Today that ratio is slightly more than three to one, and by the time today’s young workers retire, there will be only two workers to support each person on Social Security.

In order to enable Social Security to provide the type of protection that it has in the past, we will need to adapt the program to 21st century realities. This is vitally important if the program is to continue to provide important income in retirement, in periods of disability, and in widowhood.

Jennifer, from Jackson, MS writes:
This afternoon I was discussing with my neighbor(a very liberal elderly lady) the need for Social Security reform. She stated that the money intended to pay social security benefits was used for other things. I had never heard this before and was not quite sure how to answer her. Thank you.

Chuck Blahous
Jennifer, your neighbor is correct that some Social Security money is used to finance other federal spending. This is the way Social Security is designed under current law. Any money not used to pay for current benefits is made available to the federal government to spend.

The President believes that surplus Social Security money should not be spent, which is one reason why he has proposed creating a system of personal accounts. These personal accounts would save Social Security money, protecting it in the accounts of individual workers, where the government could not take it away.

Unfortunately, the failure to save Social Security money is not the only problem facing Social Security. If every penny of surplus Social Security money had been saved, going all the way back to 1983, and were earning interest all this time, the program would still become insolvent in 2041. Because there is no saving in the current system, our problems will begin in 2017, when annual tax collections are less than the cost of paying benefits. But even if the money had been saved, the system would still be heading toward insolvency. This insolvency is a result of a system that is trying to pay ever higher benefits to an increasing number of elderly.

Halting the spending of surplus Social Security money is an important first step, but it is not the only step. The government cannot “unspend” what it has spent in the past, and even if it could, the system would still be on a course toward insolvency.

charles, from sutherlin, oregon writes:
What safeguards do you feel will be required so that investments made in social security private accounts will not face undo risks in the future?

Chuck Blahous
The President has proposed personal accounts that would be administered in a manner similar to the federal employee retirement system, which has a number of important safeguards.

Individual workers would be able to select from a conservative blend of bond and stock funds. These funds would be broadly diversified. There would be no stock picking or day trading, simply the gains of prudent long-term investing.

Administrative costs would be kept low so that account balances are not eaten up by hidden fees. The federal employees’ system of accounts has extremely low administrative costs, and has resulted in substantial nest eggs being accumulated by federal workers.

The President has also proposed that a “life cycle” fund be offered to participants, which would reduce the share of their investment in stocks as they age, protecting them from sudden market swings on the eve of retirement.

Vaasu, from California writes:
Social Security was one of the greatest products of the New Deal Program under President Franklin D. Roosevelt. Ever since, the government has managed and distributed pensions to America's retirees. Shouldn't the government continue to fulfil its obligation to retired workers rather than delegating this responsibiltity to the workers themselves?

Chuck Blahous
Vaasu, the government must indeed fulfill its obligation to retired workers. The President strongly believes that there must be no changes for those now in or near retirement. Younger workers, too, should also be able to stay entirely within the current Social Security system, if they do not wish to have a personal account.

There are unfortunate realities that must be faced, however. The current system faces an enormous shortfall between the benefits that it is promising to younger workers, and the benefits it will actually be able to pay. By offering younger workers the voluntary option of a personal account, we will enable these workers the opportunity to have higher benefits than the government will be able to pay them.

Brenda, from Texas writes:
All I hear about is retirement, what about SS's provisions for surviving children and the disabled? SS was gutted enough under Reagan.

Chuck Blahous
The disability and survivors’ programs are very important elements of Social Security. When the President ran for office in 2000, he established as a fundamental principle the continuance of Social Security’s disability and survivors’ programs.

The personal accounts the President has proposed would fund retirement benefits under Social Security, and would not affect benefits for the disabled in any way. Survivors, on the other hand, would be among the leading gainers from personal accounts because of the power of inheritance. Analysis of reform plans with personal accounts consistently shows that surviving spouses and children would experience the largest benefit increases, because of the inheritability of personal accounts, something that the current system does not now provide.

Jess, from Dallas, NC writes:
I know that a lot has been said on SS but I was wondering if the young people of today could pay at least 2 to 3 more each pay check into SS would that not help with the problem. Thank you

Chuck Blahous
Jess, unfortunately even if the payroll tax were raised on young workers, the current system would not be placed on a sustainable course going forward. The payroll tax has already been raised more than 20 times in Social Security’s history, but once again we are back here grappling with the system because none of these tax increases have fixed the problem. The costs of Social Security are simply growing faster than the tax base.

Under current law, the program would experience permanent and growing cash deficits starting in 2017, just 12 years from now. If we were to raise the payroll tax by two points, from 12.4% to 14.4%, we would still face permanent deficits before 2025. Were we to raise it by 3.5 points, from 12.4% to 15.9%, we would still face permanent deficits by 2030.

Raising the payroll tax rate simply will not solve Social Security’s problems. This is why the President has called for a permanent fix for Social Security that does not rely on payroll tax rate increases.

orlando, from San Antonio, Texas writes:
if the presidents plan for social security is so good, Why isn't he talking about enacting the plan now and not in the future?to take effect right now

Chuck Blahous
The President has been traveling the country talking about the need to fix Social Security, and discussing the value of personal accounts. The President is seeking to enact Social Security reform this year, at the earliest possible date.

The President’s proposed timeline for personal account implementation is based on the work of the Treasury Department and the Social Security Administration exploring how personal accounts could be feasibly phased in and administered. We are open to working with Congress to find the best timetable for setting up the accounts.

Tricia, from WI writes:
Instead of spending trillions of dollars to "fix" social security, why don't you put that money into the trust fund and ensure the survival of Social Security for several hundred years?

Chuck Blahous
One problem with the current system is that there is no requirement that any money actually be saved. Any money that is not used to pay for today’s Social Security benefits is loaned to the rest of the federal government to finance its current operations. The government, in return for the use of the money, issues an IOU to the Social Security Trust Fund. This IOU represents a promise to produce money when needed at a future time, money that the government can only acquire through future borrowing or taxation. Thus, even if there are assets in the Trust Fund, future taxpayers will still shoulder the cost of paying for Social Security benefits.

Unfortunately, therefore, it is not such a simple matter of issuing more bonds to the Trust Fund. The Trust Fund represents an obligation to pay, but it does not create the means.

Tricia, it’s also important to note that the President has not proposed “spending” money, but rather requiring that some Social Security money be saved in personal accounts instead of spent as under current practice. In fact, various proposals that include personal accounts have been evaluated by the Social Security Administration and would substantially reduce the long-term costs of Social Security relative to current law.

Eric, from Wilmington, DE writes:
Hi, My understanding is the the private accounts would pay out in the form an annuity. I also understand that an annuity pays a fixed rate for the life of the individual.

Now the Social Security benefit is adjusted to reflect a change in the cost of living.

My question is: How is an annuity a better deal if it can do nothing but diminish in real buying power over time?

Chuck Blahous
Eric, an annuity is only one option for receiving benefits from a personal account. The standard annuity option that would be available under the President’s proposal would provide for annual inflation adjustments so that individuals would be protected from inflation over time.

John, from Arizona writes:
The current emphasis on setting up private accounts to help social security does nothing to address the real issue of solvency. In fact it makes the situation much worse by further reducing the amounts workers pay to the amount retiree's receive. Why not address the issue of solvency, and the tough decisions necessary to solve the issue, before any discussion of allowing private accounts?

Chuck Blahous
John, first, the accounts as the President has proposed them would not make the situation worse in any respect. As workers contribute money to their accounts, they would also shift some of their benefits from the traditional system to the personal account system. In that sense, the overall finances of the system would be largely unchanged. But in another sense, the situation would be improved – a portion of the system’s future liabilities would already have been met, reducing the share of the burden to be borne by our children and grandchildren.

You can think of it this way: if you set aside money for your retirement this year, that doesn’t make your overall retirement needs “go away,” but it is still the prudent thing to do. Personal accounts may not make the system’s obligations go away, but they are a prudent means of meeting them.

Personal accounts are also a very important component of the solution simply because it is virtually impossible to otherwise fix the system in a way that is fair to younger workers. Absent the personal accounts, the only measures available to fix Social Security’s finances would involve tax increases or reductions in promised benefits, each of which would worsen the treatment of younger workers. The personal accounts enable a solution to be fair to younger workers by improving their benefit expectations.

Chris, from Long Beach, CA writes:
Why not slightly refrom Social Security rather than Diverting into Private Accounts? Won't this make the system more complex and open the possibility for an American to lose their retirement? Social Security is supposed to be a security for retiring Americans--not a gamble-- so that every working American is guaranteed something to get by.

Chuck Blahous
Chris, Social Security cannot be made sustainable by “slight” reforms. Currently, there are more than three workers paying into Social Security for each person receiving benefits. But the Baby Boomers begin to retire in 2008, just three years away. By the time today’s young workers retire, there will be only two workers to support each person on Social Security.

To get a sense of the size of the problem, consider that by the end of the actuaries’ valuation period, the payroll tax rate would need to rise from today’s 12.4% to more than 18% in order to pay full benefits under the current system, and even if that were done, the system would still not be on a sustainable course. Costs would still continue to rise afterwards.

Accordingly, if we want Social Security to be fixed permanently for our children and grandchildren, we need to modernize the program in a more lasting way.

Mike, from Syracuse, NY writes:
If the private accounts really do not do anything to shore up Social Security, and from everything I have read on both sides there is agreement it does not, why haven't we hewrd anything substantial on what is being proposed? Thanks.


Chuck Blahous
Mike, the personal accounts are in fact a very important part of fixing Social Security. By enabling younger workers to build a nest egg for retirement, we could enact a fix for the system’s finances that is more fair to them than would be relying solely on tax increases and reductions in benefits.

Also, there has been an enormous amount of specificity about how Social Security’s finances can be strengthened. In 2001, the President’s bipartisan Commission issued a report containing several fully detailed options. Since then, Members of Congress have stepped forward with detailed proposals to fix Social Security’s finances. Several of these proposals are detailed at The President, in his State of the Union address, listed a number of the specific provisions that have been put forward to eliminate Social Security’s projected shortfalls, and indicated his willingness to consider them all.

Where there has been a lack of specifics is only from opponents of personal accounts, most likely because the choices available to Congress will be much less attractive in their absence. Proponents of personal accounts, by contrast, have been extremely forthcoming with good and constructive ideas.

Ronald, from California writes:
1. How much money had the government taken from the social security fund without putting in IOU's or Bonds? 2. If we remove the $92,000.00 upper limit on social security deductions, how will it effect the future of social security?

Chuck Blahous
Ronald, whenever the government spends Social Security money, it issues an IOU to the Social Security Trust Fund. Those IOUs now equal approximately $1.7 trillion.

If the current $90,000 cap on the Social Security tax were raised, Social Security’s permanent shortfalls would be delayed but not eliminated. Estimates in 2004 by the Social Security Administration found that even if the cap were entirely eliminated, and every penny of wages in America were subject to taxation, the system’s permanent shortfalls could only be postponed by six years (from 2018 to 2024.)

Neiman, from Pearland Tx writes:
I am a 37 yr old black American. I would like to know if its true that when you die, you do not get to pass on your current social security benefits. Does your spouse or surviving blood relatives get any of the remaining money if you past away?

Chuck Blahous
Neiman, the current Social Security system does not allow workers to pass on the value of their Social Security contributions to their loved ones. There are certain circumstances in which surviving relatives can receive a “survivor” benefit – such as when a surviving spouse or child meets an eligibility age requirement – but there are also many tragic instances where workers die without being able to leave such a benefit behind to their family.

The opportunity to leave behind an inheritance is one of the most important reasons to establish personal accounts. That way, if you were to pass on before reaching the age of eligibility, you could leave behind an inheritance to your family, regardless of their own eligibility for traditional Social Security benefits.

Ted, from U.S. government, Brussels, Belgium writes:
If the main problem with Social Security is a future shortage of money, how will private accounts solve that issue?

Chuck Blahous
Ted, perhaps this will be a helpful way to think of it.

The current Social Security program faces a large projected shortfall. In other words, it faces a large gap between the revenues it has available, and the benefits it has promised. As a consequence, many young workers will receive significantly less than they are currently being promised in the future from the traditional Social Security system.

The personal accounts help by giving workers a chance to get some of that money back. By enabling workers to save a portion of the payroll taxes that they now contribute, they can build a nest egg over time, enabling them to seek higher benefits in the future than the current system will be able to pay them.

Thank you for your participation in today's chat. Chuck enjoyed your questions and looks forward to participating again in the near future.

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