20
Dec
2004
The future of the Social Security system - presently predicted to be broke sometime between 2042 and 2053 - doesn't depend on Mike Whalen, the founder, president, and CEO of Moline-based Heart of America Restaurants & Inns. But the Quad Cities entrepreneur could be a player in saving the program.
Last month, the National Center for Policy Analysis, a think tank with offices in Washington, D.C., and Dallas that favors free-market reforms of government programs, named the charismatic Whalen its policy chairperson. The organization, led by founder and President John C. Goodman, was one of early advocates of health savings accounts. In 1980 Goodman also authored the first published study on the possibility of privatizing Social Security.
Whalen calls the National Center for Policy Analysis (NCPA) "the most effective think tank in the country," and the organization's new initiative will certainly put that claim to the test. Last week, NCPA staff members were in the Quad Cities to plan a $1.5-million, 10-state grass-roots initiative to educate the public about the looming crisis in Social Security.
Low Expectations
Most young Americans expect that Social Security won't be around for them. According to National Underwriter, a 2003 survey found that two-thirds of workers between the ages of 21 and 35 believe Social Security won't exist when they retire.
And concern isn't limited to young workers. A November 2004 poll by CBS News/New York Times found that 51 percent of adults don't believe the Social Security system will "have the money available to provide the benefits you expect for your retirement."
Yet in spite of that, it's unclear to what degree the American public supports the reforms supported by the NCPA and prominent Republicans, including President George W. Bush. Although some Democrats support creating a system in which workers can invest some of their payroll taxes - which currently go to fund the Social Security system - the debate over the retirement program generally breaks down along party lines.
What voters think about privatizing a portion of the federal retirement benefit depends on how the question is asked. In general, poll respondents react favorably when the question focuses on giving workers a choice to privately invest some of the money they've paid into the Social Security system. Positive responses drop significantly - usually far below 50 percent - when it's specifically asked whether workers should be allowed to invest in the stock market. (For a sampling of poll questions from a variety of sources and their responses, visit http://www.pollingreport.com/social.htm.)
The question about the health of Social Security isn't black and white, even though nobody disputes the basic facts. The difference largely stems from whether one believes those facts represent a crisis that needs to be dealt with quickly and drastically.
Defenders of the current system point out that the program will be able to pay all scheduled benefits through at least 2042. Reform proponents don't dispute that. But they claim the number is deceptive. That date is when Social Security is schedule to have emptied its coffers.
A year of even more import, reformers say, is 2018. That's when the system will start paying out more money than it brings in each year. And that's when Social Security will start to be in serious trouble.
When Social Security was started in 1935 as a way to supplement the incomes of the elderly, it had 40 workers paying in for every recipient of benefits. That ratio is now three to one, and it will shrink to two to one in 10 years, as more and more Baby Boomers retire without workers to replace them. This is an "unsustainable course," said Sean R. Tuffnell, NCPA's senior manager of media relations and special projects.
The issue isn't whether Social Security should be reformed, but when and how. Whalen said that the prevailing view in Washington is NIMTOF - Not in My Term of Office. Politicians who support the status quo aren't saying that the system doesn't need be changed, just that it doesn't need to be changed now.
And the changes don't need to be as drastic as those supported by President Bush and groups such as NCPA. Payroll taxes could be hiked, benefits could be cut, or the age one becomes eligible for benefits could be raised. Jacking the retirement age up would delay the system's bankruptcy but not stop it.
And the other options would carry a high cost. When the system runs out of money, it won't be able to pay out any more than it brings in. Because the number of retirees would be higher than the number of workers, benefits could be cut in half, or payroll taxes could jump by 40 percent, said Matthew P. Moore, NCPA senior policy analyst. "You'll be getting what the current system can afford to pay you," he said.
Those draconian numbers are a bit extreme; they assume that no reforms are put in place before 2042. Even relatively minor benefit, tax, or retirement-age adjustments would extend the life of Social Security. And given the political difficulty of a major policy change, those are far more likely than a sweeping overhaul of the system.
But those tweaks are unacceptable to Whalen and his organization. The government has implicitly promised certain benefits at a certain age, he said, and it should deliver. It's not right for people who've paid into the system to get back nothing or only a portion of what they've put in.
"Social Security exists for a reason," Moore said. "People aren't saving enough for retirement."
And the NCPA believes that the next year is an ideal time for reform. "2005 is our golden opportunity," Tuffnell said. "2005 is our window."
The Bush administration's support last week for private retirement accounts provides momentum, Tuffnell said. "Without an administration [willing to support a program], why should you [as a member of Congress] stick your neck out?"
In addition to the president throwing his weight behind reform and having just come off his re-election, 2005 isn't an election year - a critical point with an issue so polarizing.
Candidates should be leery not only of supporting reform but of not taking action, Whalen said. "There will be political repercussions for people who don't get involved," he said.
Models for Reform
Opponents of Social Security reform like to cast investing payroll taxes in the stock market as risky - that there's the chance people could lose their money.
Strictly speaking, that's true. But it ignores that any reform plan would probably be extremely conservative in its private-sector options, allowing for investments in broad index funds rather than higher-risk individual stocks. That would make it much like the federal Thrift Savings Plan, which has basically served as a pilot program for Social Security privatization. "There's been a model for this for 20 years," Whalen said.
In it, federal workers - in addition to their payroll taxes - may contribute a portion of their incomes into the Thrift Savings Plan. They have five investment options: government securities investments (which carry no risk but have a small return on investment); fixed-income index investments (low risk and not invested in the stock market); common stock index investments (tracks the stock market as a whole by following one of its indices, such as the Standard & Poor's 500); small capitalization stock index investments (basically covering stocks not included in the major indices); and international stock index investments.
From 1993 through 2002, the annual rate of return on all of those funds ranged from 3.92 percent to 9.29 percent. Social Security has averaged between 1 and 1.5 percent return on its investment, Whalen said. He jokes that the issue of investing Social Security funds in the private sector comes down to a simple question: "Do you believe that you can beat zero? If we can't beat zero, we've got a bigger problem."
Virtually all proponents use the Thrift Savings Plan as evidence of the wisdom of privatizing Social Security. Most Social Security plans would allow workers to divert a percentage of their payroll taxes - for instance, two percentage points of the 10.6-percent payroll tax (on the first $84,900 a worker earns a year) that goes to the Social Security retirement fund - to private investments. Those investments would be part of a person's personal retirement account, to which they have a "property right." That's a way of saying they own it, and it can be passed to their heirs once a person dies.
Most plans have certain shortcomings, though. For one thing, they typically don't identify how the federal government would pay for the transition to privatization, estimated to be at least $1 trillion.
Even more troubling to people such as Whalen, the plans don't do anything to address a serious problem: the fact that Americans simply don't save enough money for retirement. Allowing workers to invest some of their Social Security money does nothing to change this.
"Social Security is the public housing of retirement land," Whalen said. Instead of helping people to save for their retirement, it simply provides a retirement benefit. The NCPA bristles at being called a "conservative" think tank. It claims to have a "free market" rather than a conservative bent. "Ours is an empowerment philosophy," Tuffnell said.
The NCPA plan tries to remedy the situations of both the transition costs and the lack of retirement savings. First of all, it's optional, but with a strong incentive to buy in. People who agree to participate can expect retirement benefits similar to those currently provided by Social Security. People who opt not to participate will have their benefits cut, because one of the premises of the proposal is that the rate of payroll taxes will not increase. (Visit http://www.ncpa.org/pub/st/st272/st272.pdf to see the NCRA proposal.)
The NCPA plan would allow participants to invest a portion of their payroll taxes in a personal retirement account (PRA). The amount of that contribution will vary by income, with lower-income workers contributing the highest percentage of their payroll taxes to PRAs. Workers would be required to put an additional 1.25 percent of their wages into the account, and their employers would match that contribution. The program essentially rolls into one program elements of Social Security and a 401(k) program. During retirement, workers would receive two checks, one from Social Security and one from a private annuity purchased by the money in a PRA.
"This proposal has two explicit guarantees to PRA participants," the plan says. "(1) Everyone at or near retirement will receive all promised Social Security benefits; and (2) everyone else who has participated full-time the labor force for 35 years will have a retirement income equal to at least 150 percent of poverty level." That guarantee would be backed by the payroll taxes of nonparticipants, and the undiverted payroll taxes of participants.
Monthly PRA retirement benefits would reflect the performance of a person's investments; if the account did better than the federal government's, a person would get a larger benefit, for instance.
Although less money would be coming into the Social Security system through the program, the assumption is that additional employee and employer contributions and the better performance of private-sector investments would help pay for the transition costs.
Those additional contributions distinguish the NCRA proposal from competing plans, and critics could note that they have the same effect on the bottom lines of workers and businesses as an increase in the payroll tax. The difference is that employees will own their PRAs.
"That's the only way you can save this system," Moore said.
The NCPA Initiative
The NCPA's proposal stands little chance of being passed as it is.
"We don't lobby," Tuffnell acknowledged. The organization's goal is to "build a public understanding of the need for reform and the benefits of reform."
Still, the organization could have an impact on any reform that does happen. And Whalen and the organization's staff think that any private-investment change to Social Security will be a good thing.
The grass-roots NCPA effort will target 10 states, chosen because they house key members of the Senate and for their geographic balance. The tentative list of states includes Iowa, Arizona, Florida, Kentucky, Missouri, Ohio, Oklahoma, Pennsylvania, Tennessee, and Wisconsin.
The program has a budget of $1.5 million, which the NCPA is now trying to raise. The organization recognizes the importance of measurable goals but hasn't set any benchmarks yet.
The initiative is not a media campaign but an effort to connect with people. "Politics is personal," Tuffnell said. Leaders in each state will recruit people to talk to civic organizations and editorial boards "about how it impacts them," he added.
The task isn't merely to convince people that private investment in Social Security is a good idea, but that the proposal needs to be realistic. Right now, Tuffnell said, there's a tug of war between people who say the Social Security system is not in dire need of reform and those who claim overhauling the system can be done for little or no money. While Bush supports reform, for instance, he's been vague and hasn't offered any indication where money for privatization will come from.
It's crucial that a reform program funds itself, Tuffnell added. "I don't want to put the burden on the honesty of future Congresses," he said.
Whalen predicts that Congress will take dramatic action toward privatization. "We'll come away with some real reform," he said. "I don't think Congress will want to address this every year."
Last month, the National Center for Policy Analysis, a think tank with offices in Washington, D.C., and Dallas that favors free-market reforms of government programs, named the charismatic Whalen its policy chairperson. The organization, led by founder and President John C. Goodman, was one of early advocates of health savings accounts. In 1980 Goodman also authored the first published study on the possibility of privatizing Social Security.
Whalen calls the National Center for Policy Analysis (NCPA) "the most effective think tank in the country," and the organization's new initiative will certainly put that claim to the test. Last week, NCPA staff members were in the Quad Cities to plan a $1.5-million, 10-state grass-roots initiative to educate the public about the looming crisis in Social Security.
Low Expectations
Most young Americans expect that Social Security won't be around for them. According to National Underwriter, a 2003 survey found that two-thirds of workers between the ages of 21 and 35 believe Social Security won't exist when they retire.
And concern isn't limited to young workers. A November 2004 poll by CBS News/New York Times found that 51 percent of adults don't believe the Social Security system will "have the money available to provide the benefits you expect for your retirement."
Yet in spite of that, it's unclear to what degree the American public supports the reforms supported by the NCPA and prominent Republicans, including President George W. Bush. Although some Democrats support creating a system in which workers can invest some of their payroll taxes - which currently go to fund the Social Security system - the debate over the retirement program generally breaks down along party lines.
What voters think about privatizing a portion of the federal retirement benefit depends on how the question is asked. In general, poll respondents react favorably when the question focuses on giving workers a choice to privately invest some of the money they've paid into the Social Security system. Positive responses drop significantly - usually far below 50 percent - when it's specifically asked whether workers should be allowed to invest in the stock market. (For a sampling of poll questions from a variety of sources and their responses, visit http://www.pollingreport.com/social.htm.)
The question about the health of Social Security isn't black and white, even though nobody disputes the basic facts. The difference largely stems from whether one believes those facts represent a crisis that needs to be dealt with quickly and drastically.
Defenders of the current system point out that the program will be able to pay all scheduled benefits through at least 2042. Reform proponents don't dispute that. But they claim the number is deceptive. That date is when Social Security is schedule to have emptied its coffers.
A year of even more import, reformers say, is 2018. That's when the system will start paying out more money than it brings in each year. And that's when Social Security will start to be in serious trouble.
When Social Security was started in 1935 as a way to supplement the incomes of the elderly, it had 40 workers paying in for every recipient of benefits. That ratio is now three to one, and it will shrink to two to one in 10 years, as more and more Baby Boomers retire without workers to replace them. This is an "unsustainable course," said Sean R. Tuffnell, NCPA's senior manager of media relations and special projects.
The issue isn't whether Social Security should be reformed, but when and how. Whalen said that the prevailing view in Washington is NIMTOF - Not in My Term of Office. Politicians who support the status quo aren't saying that the system doesn't need be changed, just that it doesn't need to be changed now.
And the changes don't need to be as drastic as those supported by President Bush and groups such as NCPA. Payroll taxes could be hiked, benefits could be cut, or the age one becomes eligible for benefits could be raised. Jacking the retirement age up would delay the system's bankruptcy but not stop it.
And the other options would carry a high cost. When the system runs out of money, it won't be able to pay out any more than it brings in. Because the number of retirees would be higher than the number of workers, benefits could be cut in half, or payroll taxes could jump by 40 percent, said Matthew P. Moore, NCPA senior policy analyst. "You'll be getting what the current system can afford to pay you," he said.
Those draconian numbers are a bit extreme; they assume that no reforms are put in place before 2042. Even relatively minor benefit, tax, or retirement-age adjustments would extend the life of Social Security. And given the political difficulty of a major policy change, those are far more likely than a sweeping overhaul of the system.
But those tweaks are unacceptable to Whalen and his organization. The government has implicitly promised certain benefits at a certain age, he said, and it should deliver. It's not right for people who've paid into the system to get back nothing or only a portion of what they've put in.
"Social Security exists for a reason," Moore said. "People aren't saving enough for retirement."
And the NCPA believes that the next year is an ideal time for reform. "2005 is our golden opportunity," Tuffnell said. "2005 is our window."
The Bush administration's support last week for private retirement accounts provides momentum, Tuffnell said. "Without an administration [willing to support a program], why should you [as a member of Congress] stick your neck out?"
In addition to the president throwing his weight behind reform and having just come off his re-election, 2005 isn't an election year - a critical point with an issue so polarizing.
Candidates should be leery not only of supporting reform but of not taking action, Whalen said. "There will be political repercussions for people who don't get involved," he said.
Models for Reform
Opponents of Social Security reform like to cast investing payroll taxes in the stock market as risky - that there's the chance people could lose their money.
Strictly speaking, that's true. But it ignores that any reform plan would probably be extremely conservative in its private-sector options, allowing for investments in broad index funds rather than higher-risk individual stocks. That would make it much like the federal Thrift Savings Plan, which has basically served as a pilot program for Social Security privatization. "There's been a model for this for 20 years," Whalen said.
In it, federal workers - in addition to their payroll taxes - may contribute a portion of their incomes into the Thrift Savings Plan. They have five investment options: government securities investments (which carry no risk but have a small return on investment); fixed-income index investments (low risk and not invested in the stock market); common stock index investments (tracks the stock market as a whole by following one of its indices, such as the Standard & Poor's 500); small capitalization stock index investments (basically covering stocks not included in the major indices); and international stock index investments.
From 1993 through 2002, the annual rate of return on all of those funds ranged from 3.92 percent to 9.29 percent. Social Security has averaged between 1 and 1.5 percent return on its investment, Whalen said. He jokes that the issue of investing Social Security funds in the private sector comes down to a simple question: "Do you believe that you can beat zero? If we can't beat zero, we've got a bigger problem."
Virtually all proponents use the Thrift Savings Plan as evidence of the wisdom of privatizing Social Security. Most Social Security plans would allow workers to divert a percentage of their payroll taxes - for instance, two percentage points of the 10.6-percent payroll tax (on the first $84,900 a worker earns a year) that goes to the Social Security retirement fund - to private investments. Those investments would be part of a person's personal retirement account, to which they have a "property right." That's a way of saying they own it, and it can be passed to their heirs once a person dies.
Most plans have certain shortcomings, though. For one thing, they typically don't identify how the federal government would pay for the transition to privatization, estimated to be at least $1 trillion.
Even more troubling to people such as Whalen, the plans don't do anything to address a serious problem: the fact that Americans simply don't save enough money for retirement. Allowing workers to invest some of their Social Security money does nothing to change this.
"Social Security is the public housing of retirement land," Whalen said. Instead of helping people to save for their retirement, it simply provides a retirement benefit. The NCPA bristles at being called a "conservative" think tank. It claims to have a "free market" rather than a conservative bent. "Ours is an empowerment philosophy," Tuffnell said.
The NCPA plan tries to remedy the situations of both the transition costs and the lack of retirement savings. First of all, it's optional, but with a strong incentive to buy in. People who agree to participate can expect retirement benefits similar to those currently provided by Social Security. People who opt not to participate will have their benefits cut, because one of the premises of the proposal is that the rate of payroll taxes will not increase. (Visit http://www.ncpa.org/pub/st/st272/st272.pdf to see the NCRA proposal.)
The NCPA plan would allow participants to invest a portion of their payroll taxes in a personal retirement account (PRA). The amount of that contribution will vary by income, with lower-income workers contributing the highest percentage of their payroll taxes to PRAs. Workers would be required to put an additional 1.25 percent of their wages into the account, and their employers would match that contribution. The program essentially rolls into one program elements of Social Security and a 401(k) program. During retirement, workers would receive two checks, one from Social Security and one from a private annuity purchased by the money in a PRA.
"This proposal has two explicit guarantees to PRA participants," the plan says. "(1) Everyone at or near retirement will receive all promised Social Security benefits; and (2) everyone else who has participated full-time the labor force for 35 years will have a retirement income equal to at least 150 percent of poverty level." That guarantee would be backed by the payroll taxes of nonparticipants, and the undiverted payroll taxes of participants.
Monthly PRA retirement benefits would reflect the performance of a person's investments; if the account did better than the federal government's, a person would get a larger benefit, for instance.
Although less money would be coming into the Social Security system through the program, the assumption is that additional employee and employer contributions and the better performance of private-sector investments would help pay for the transition costs.
Those additional contributions distinguish the NCRA proposal from competing plans, and critics could note that they have the same effect on the bottom lines of workers and businesses as an increase in the payroll tax. The difference is that employees will own their PRAs.
"That's the only way you can save this system," Moore said.
The NCPA Initiative
The NCPA's proposal stands little chance of being passed as it is.
"We don't lobby," Tuffnell acknowledged. The organization's goal is to "build a public understanding of the need for reform and the benefits of reform."
Still, the organization could have an impact on any reform that does happen. And Whalen and the organization's staff think that any private-investment change to Social Security will be a good thing.
The grass-roots NCPA effort will target 10 states, chosen because they house key members of the Senate and for their geographic balance. The tentative list of states includes Iowa, Arizona, Florida, Kentucky, Missouri, Ohio, Oklahoma, Pennsylvania, Tennessee, and Wisconsin.
The program has a budget of $1.5 million, which the NCPA is now trying to raise. The organization recognizes the importance of measurable goals but hasn't set any benchmarks yet.
The initiative is not a media campaign but an effort to connect with people. "Politics is personal," Tuffnell said. Leaders in each state will recruit people to talk to civic organizations and editorial boards "about how it impacts them," he added.
The task isn't merely to convince people that private investment in Social Security is a good idea, but that the proposal needs to be realistic. Right now, Tuffnell said, there's a tug of war between people who say the Social Security system is not in dire need of reform and those who claim overhauling the system can be done for little or no money. While Bush supports reform, for instance, he's been vague and hasn't offered any indication where money for privatization will come from.
It's crucial that a reform program funds itself, Tuffnell added. "I don't want to put the burden on the honesty of future Congresses," he said.
Whalen predicts that Congress will take dramatic action toward privatization. "We'll come away with some real reform," he said. "I don't think Congress will want to address this every year."
