Chuck Blahous hosts Ask the White House (Text Only)

Chuck Blahous
Good afternoon. Thank you in advance for this opportunity to address your questions about Social Security. The Social Security discussion has come a long way in recent months. The President has been discussing Social Security's challenges in conversations around the country throughout the year. Both the Senate and the House have held a number of hearings addressing important aspects of Social Security. We look forward to the completion of legislative action to permanently fix Social Security for our children and grandchildren.

Todd, from Gilroy, CA writes:
The President's plan to wean our country away from the present Social Security system makes good sense to me. I am happy any time that I can have better control over my financial future.

Still, many are doubting and criticizing this plan. Are these doubts and criticisms politically motivated? How can more options in retirement planning be a bad thing?

Chuck Blahous
Todd, thank you for your emphasis on the voluntary nature of the President’s proposed personal accounts. Under the President’s proposal, workers would have a choice. They could stay entirely within the current Social Security structure and receive the benefits that it can provide. Or, they could exercise the option to save some of their payroll taxes in a personal account that they would own and control.

The current system does not provide this element of ownership. Workers’ payroll taxes are not saved in individual accounts bearing their name, over which they would have property rights. Instead, benefits can be changed at any time by a vote of Congress. Some workers pass on before receiving any benefits from Social Security, without being able to provide an inheritance to their families based on the taxes they contributed. By contrast, workers with personal accounts would have an ownership stake. If they died before reaching retirement age, their families could inherit the assets that they have built up.

I would be remiss if I did not mention that the President’s plan would not wean anyone away from traditional Social Security who preferred the current system as it is. No worker would be required to take a personal account.

Fredrick, from Trenton, SC writes:
What will happen to the social security investment accounts when the market takes a sharp dpwnturn as someone is getting to retire? I know what happened to my 401k a few years ago. I am just now beginning to recover from it.

Chuck Blahous
Fredrick, this is an excellent question. The President’s personal accounts have a number of features that would protect workers from market swings on the verge of retirement.

For example, workers would be offered a “life cycle fund” that would gradually reduce the share of their investments in stocks as they age. The closer a worker is to retirement, the greater the share of this fund that would be invested in riskless investments such as government bonds.

More generally, all the funds offered to workers would be safe, broadly indexed funds like those provided to federal employees in our own retirement system. Workers would not be picking individual stocks or sectors of the market, but instead would get the benefits of long-term investing in the market as a whole. Over a full working lifetime of 40 years, American markets have never failed to deliver a positive return.

Markets fluctuate from year to year, but the important thing for workers is that over the long term, sound investments do provide safe returns. This is why, even after a market downturn, workers are better prepared for retirement if they have a savings account than if they don’t have one.

Eric, from Arizona writes:
If social security is a pay as you go system, are there any trust funds that have a better yield, and if so are there any contingency plans to build a safety net into the reform giving the people a 3 billion dollar emergency fund where all monies after that can be utilized for other government programs. The Government is spending our future, right.

Chuck Blahous
Eric, you have touched on one of the most important reasons that we favor personal accounts.

Under the current Social Security system, most of a worker’s payroll taxes are used immediately to pay for the benefits of those now in retirement. Any excess taxes are provided to the rest of the government, which uses them to pay for other current government functions. The government in effect promises to pay this money back in the future, but no money is actually saved.

The President believes that we should start saving Social Security money for the future, instead of permitting the federal government to continue to spend it. The only effective way to do that, we believe, is through personal accounts that are owned by individual workers. If the government, rather than individual workers, continues to own and control the money, then the government will spend it.

You have probably heard of the concept of a “transition cost” as applied to personal accounts. A “transition cost” is not really a new “cost” but is simply the requirement that some Social Security money be saved, to fund future benefits, rather than spent. This seems like an undesirable thing to someone who wants to spend the money, but from Social Security’s perspective, saving the money is a good thing. The President believes that Social Security money belongs to workers, and that the federal government shouldn’t continue to be allowed to spend it all. This is one reason why he wants workers to have the option of having a personal account: to limit and eventually end the current-law practice of spending Social Security money on other government functions.

Michael, from Boston, MA writes:
I noticed on a news site that the President said that the Trust Fund is merely paper IOUs. But aren't they backed by the US Government? Should we be concerned that the Government is going to default on the "IOUs"?

The question is not whether the government will default on its debt, but rather the meaning of the IOUs in the Trust Fund. The government’s credit is sound, but that is a separate matter from the fundamental question of what the Trust Fund really means.

Suppose that you set up a retirement account for yourself. And, suppose also that you took some money out of the account to buy yourself a new boat. You still intend to save money for retirement, so you put an IOU in the vault expressing your intention to eventually pay yourself back, within your own account, for the money that you have spent.

Now, even if your credit is perfectly good, there is still no money there if you have spent it. Your bank, your credit card company, and others, may have justified faith in your ability to pay your debts. But despite this perfectly good credit, an IOU written to yourself is still just an IOU. At some point, you still have to come up with the money.

The government’s situation with Social Security is quite similar. The government’s credit may be fine, but writing IOUs between government accounts does not provide the financing to pay for future benefits. When those IOUs come due, the government will still need to find the money. At that time, its only choices will be to raise taxes, borrow the money, or cut benefits or other government spending.

In sum, the IOUs in the Trust Fund represent the commitment to pay benefits, but not the means. Even if the commitment is binding, we must still develop the means.

Scoop, from Jackson Mississippi writes:
What does quantum chemistry have to do with Social Security?

Chuck Blahous
Not much! I suppose that it provided me with some much-needed training in staring at myriad charts and tables of numbers. I’m very fortunate to have had the opportunities given to me since my scientific research many years ago.

Dan, from Washington DC writes:
Chuck, Thanks for taking my question. It's great to have a chance to ask the White House questions. And OK, I get that Social Security is pay-as-you-go. So why are people paying more in payroll tax right now than they need to?

Chuck Blahous
This is a terrific question because it reflects directly on how we got into our current situation, and why the President believes so strongly that we must fix Social Security permanently for our children and grandchildren.

In 1983, there was a historic bipartisan agreement to shore up Social Security. That legislation achieved what was known as a “75-year” fix. In other words, the Social Security system would be balanced, on average, over 75 years.

The 1983 fix, however, was not balanced year by year. It stipulated the collection of large Social Security cash surpluses in the first part of the 75 years, followed by large annual Social Security deficits in the last part of the 75 years. Although the system was deemed to be in balance on average, it was nevertheless projected to run substantial deficits in the latter part of the projected period.

In other words, workers in the 1980s, 1990s, 2000s and 2010s, would be asked to pay more in Social Security taxes than was actually needed to pay benefits at the time. Thereafter, there would be enormous deficits to confront.

The biggest problem with this approach is that no mechanism was created to actually save surplus money. The 1983 legislation did not establish personal accounts, so these cash surpluses were simply spent by the government. Thus, when the time of deficits arrives – now projected for 2017 – no actual money has been put aside to deal with upcoming deficits.

President Bush believes we must learn from this history, and together enact a permanent fix for Social Security. Part of the answer, we believe, is allowing surplus Social Security money to be saved in personal accounts so that it is not spent.

Trey, from Kentucky writes:
I recently attended an event in Louisville, KY where President Bush was discussing Social Security. As a 15 year old, I realize that the current Social Security System is in trouble, and I would just like to tell the President thanks for bringing this issue up to help my generation.

Chuck Blahous
Trey, thank you very much. Your future means a great deal to the President, and your words are much appreciated. It’s also very commendable that you are already studying important public policy issues.

Jennifer, from Long Beach, California writes:
Although the current social security program may look weak in upcoming years, what makes the Bush Administration so certain that the proposed privitization of social security is the way to go for furture generations?

Chuck Blahous
Jennifer, the first point I would make is that the President does not favor privatizing Social Security. Workers who prefer the Social Security system as it is run now would continue to draw their benefits in exactly the same way as today. The government would also continue to operate the program, even for those who choose personal accounts.

The challenges facing Social Security are not in serious doubt. In 1950, there were 16 workers to support each person on Social Security. Today there are slightly more than three. By the time today’s young workers retire, there will be only two workers to support each person on Social Security.

A “pay as you go” system like Social Security can work when there are enough workers to support each person receiving benefits. But as the ratio of workers to collectors gets smaller, something has to give. Currently, the Social Security Trustees estimate that by 2017, the program will cost more to run than it collects in annual taxes. They also found a 95% chance that these deficits – which would be permanent and perpetually growing – would arise some time between 2013 and 2022. So there is no significant chance of the system turning around unless we act.

There are a number of reasons why we believe personal accounts are important. One is to ensure that some Social Security money is saved for the future, rather than spent. Another is so that workers have a chance to improve upon the lower and lower rates of return that the current system would inflict upon workers as the ratio of workers to collectors drops, and taxes must either be raised or benefits reduced. A third very important reason is to give workers something that they own and can bequeath to their families if they pass on before retirement. Currently, many families fall through the cracks of Social Security’s protections when an important household earner dies at a time when no one in the family is eligible for benefits. With a personal account, this family could inherit something based on the money that worker contributed.

Nancy, from Eugene, Oregon writes:
Why don't you simply encourage, or give incentives through tax breaks, for people to save money in private retirement accounts rather than taking the money from Social Security taxes for this purpose. Everyone knows that the method the president is proposing will create more problems than it solves. Can't you educate people that Social Security is meant to be a supplement for their retirement and they're responsible for saving money for the rest?

Chuck Blahous
Nancy, we believe there are a number of issues with that approach.

One is that many workers simply don’t have additional money to put aside. After the 12.4% payroll tax is applied to the wages of lower-income workers, they do not have enough to put aside in additional savings and still make ends meet. Higher-wage workers may be able to take better advantage of tax-favored savings vehicles, but for many lower-wage workers, their Social Security taxes are their only real opportunity to save.

Second, such an approach sidesteps the problems facing Social Security. We have many tax-advantaged savings programs now, such as IRAs and 401(k)s, but Social Security’s problems are still there. Unless personal accounts are created within Social Security, no Social Security money will be saved to deal with the program’s future obligations.

Thirdly, and very importantly, we need to remember that Americans of a wide range of income levels depend to a degree on the Social Security system. Whatever the merits of other savings programs, we still need to fix Social Security so that it can work well in the future.

Lauren, from Reno, Nevada writes:
I'm sure this seems like a silly question, but I was wondering what the President's current policy on Social Security Reform is? I'm trying to write a paper for my college Political Science class and was having difficulty finding the right information. Thank you for your help

Chuck Blahous
Lauren, I'm pleased to have the chance to help you with your Political Science class assignment.

The President's most important policy principle is that we need to act to fix Social Security for our children and grandchildren.

Social Security is currently a "pay as you go" program. This means that it is a program in which the taxes of workers are spent immediately on benefits for today's seniors, and on other government programs. No money is actually saved for the future under the current system.

This kind of system can work well if there are enough workers to support every person on Social Security. But that is not our situation. In 1950, there were 16 workers to support each person on Social Security. Today there are slightly more than three. By the time today's young workers retire, there will be only two workers to support each person on Social Security.

The changes will begin to accelerate as early as 2008, when the first Baby Boomers turn 62 and begin to retire. Then we will have an enormous increase in system costs. By 2017, the program will have less money coming in than is needed to pay full benefits.

The President wants to work with Congress to determine the specific details of the remainder of a system fix, but these are the basic elements of his program.

Kathryn, from Monroe, GA writes:
Many individuals have retirement funds that do not rely on Social Security. Has any thought been given to allowing a full tax credit to those individuals who choose NOT to receive Social Security benefits because their personal finances do not need to rely on this source of income?

Chuck Blahous
Kathryn, we appreciate all interesting ideas, and this is certainly one.

One important thing to remember is the large magnitude of Social Security’s future shortfalls. Under current projections, approximately one-third of long-term benefits are unfunded. This means that one-third of all beneficiaries would have to give up the entirety of their benefits in order to fix the system. Because this is very unlikely, we still need to take other significant actions to fix the system’s finances.

Jessica, from Waterford, CT writes:
Isn't the Presidents Social Security proposal designed to help Wall Street? It certainly doesn't seem like it will help the American people by adding more debt and giving less benefits. Why can't we just raise the rate of pay SS is taxed from $90,000.00 to $140,000.00? That would solve this so called "crisis" and judging by the polls has the approval of the American people more than privatization does.

Chuck Blahous
Jessica, this has been suggested by others and is on the table. However, it is interesting to note that raising the cap on taxable wages from $90,000 to $140,000 would do very little to make Social Security permanently solvent. Social Security pays benefits in proportion to worker contributions, so increasing the wages subject to tax, while it brings in additional revenue in the near term, obligates more benefits in the long term. This particular provision would only postpone the program’s permanent deficits by a couple of years, and would reduce the long-term deficits facing the program only by about 14 percent. Much more needs to be done to fix the system.

As we see it, the problem is not that Social Security taxes are too low. We believe that Social Security taxes are already quite high. The problem that we see is that we don’t save the Social Security money that we already collect, which is why we need personal accounts.

The suggestion that personal accounts would be a boon to Wall Street is a myth that has been punctured by some good recent analysis by nonpartisan watch groups such as factcheck.org.

The President has modeled his proposed personal accounts on the Thrift Savings Plan now used by federal employees. Most of the administrative expenses of this system are handled by the federal government. The factcheck.org study stated that Wall Street only earns 16 cents from every $10,000 invested by federal employees.

Mandy, from Arizona writes:
Mr. Blahous, Can you explain what the Presidents plan for personal savings accounts will do to help Social Security?Thank you for taking questions today. This is my first time submitting a question. Mandy

Chuck Blahous
Mandy, thanks for asking the question. I hope that it won’t be the last time. Personal accounts would accomplish a number of things.

First, they would give workers the right to require that a portion of their payroll taxes be saved rather than spent. Currently, Social Security law facilitates the spending of all Social Security money.

Second, they would provide workers with an ownership stake in Social Security. Currently, workers have no property right to their Social Security benefits, which can be changed at any time. Retirement security is increased when workers own retirement assets cannot be taken away.

Third, they would give workers the opportunity to seek a higher rate of return on their Social Security payroll taxes. This is important because the current system will provide worsened rates of return to each succeeding generation, due to the decreasing ratio of workers to beneficiaries. If a system takes more money from people than it gives back, it is very hard for it to function as an effective protection for them.

Fourth, personal accounts enable benefits to reach many people who don’t receive benefits under the current system. Many families miss out on benefits if a household worker dies before retirement age, while a widow and children are not themselves of the right age to be eligible for survivor benefits. Many divorced women, too, fall through the cracks of the current system, if their marriage lasted for less than ten years (less than the eligibility requirement for spousal benefits) and if they don’t have a sufficient earnings record of their own. Because personal accounts belong to the worker, they provide an asset that cannot be taken away even if life circumstances change in a way that was not anticipated by current Social Security benefit formulas.

Chuck Blahous
Once again, this was a very thought-provoking series of questions. Thanks for contributing your interest and thought to this issue. I hope that my answers were helpful.