Bush Budget: Personal Accounts "Core" of Social Security Reform

April 13, 2001

The Bush administration released its full fiscal year 2002 budget on Monday, reiterating its concerns regarding the Social Security program and its commitment to reform based on personal retirement accounts. Following is an excerpt from the Bush budget:

"Social Security is designed to be self-financed; its most important revenue source is the payroll tax. Pressure on the financing system is growing due to two demographic factors: members of the baby boom and subsequent generations are having fewer children and are predicted to have longer life spans than previous generations. The consequence of these trends is that the ratio of workers paying into the system for each beneficiary will decline from 5.1 in 1960 to 3.4 today to 2.1 in 2030. These demographic trends will strain the Government's ability to make benefit payments at current payroll tax rates. Based on the 2001 Trustee's Report, the Social Security trust funds are expected to run a cash surplus until 2016. However, cash revenues will fall short of expenditures after that time, and the trust funds will exhaust their assets in 2038 unless corrective action is taken. After 2038, payroll taxes are projected to cover 73 percent of expenditures. Social Security is largely "pay-as-you-go," meaning current retirement benefits are financed by current payroll contributions. Another source of pressure on the trust funds is the rapid growth of the DI program, which is expected to accelerate as baby boomers reach the age at which they are increasingly prone to disabilities. As a result of these trends, Social Security's spending path is unsustainable in the long run."

"The Social Security system faces a long-term unfunded liability of $8.7 trillion. In addition, the pay-as-you-go structure of Social Security leads to substantial generational inequities in average rate of return. Future retirees on average can expect to get back from Social Security barely more than they put in. The first generations of workers covered by Social Security experienced low payroll tax rates because there were relatively few retirees to support in the early years of the program. The earliest cohorts also paid taxes for only a portion of their working lives. Consequently, these early generations enjoyed a high rate of return from the program because the benefits they received exceeded their payroll tax contributions by a comfortable margin. As the system matured, payroll taxes rose to support an expanding beneficiary population, and rates of return declined. (See Chart 15–1.)

"Restoring Social Security to financial balance solely through benefit cuts or tax increases would only worsen the returns that workers would get from the system. One way to address the long-term financial crisis is to allow individuals to keep some of their payroll taxes in personal retirement accounts that can earn higher rates of return through investment in private equities markets. The President is committed to modernizing and reforming Social Security, so that the system will be better able to meet the needs of tomorrow's retirees. The President will form a commission that will examine Social Security and present recommendations for reform next fall.

"The President believes that Social Security reform should be based on the following principles:

• Modernization must not change existing benefits for current retirees or near-retirees, and it must preserve the disability and survivors' components. The promises made to current retirees must be kept.
• The Social Security surplus must be preserved only for Social Security. For 30 years, Social Security surpluses have been used to mask spending increases in programs unrelated to Social Security. Surpluses in the Social Security trust funds will total $2.6 trillion over the next 10 years. These surpluses will be saved for Social Security reform and will be used to reduce debt held by the public until Social Security reform is enacted.
• Social Security payroll taxes must not be increased, as they have been 20 times since the program began in 1937.
• The Government itself must not invest Social Security funds in the private economy.
• Successful Social Security reform, which addresses both the long-term unfunded liability and the generational inequities, must be built upon a core of individually controlled, voluntary personal retirement accounts that will augment the Social Security safety net."

Perhaps the most significant portion of the administration's statement on Social Security is its pledge that the Social Security surplus "will be used to reduce debt held by the public until Social Security reform is enacted." This makes available for personal accounts the full payroll tax surplus of over $2.5 trillion, meaning that accounts investing substantially more than 2 percent of a worker's wages are feasible.

"It's your money, your choice, your future."

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