A. Who Benefits?
Social Security is not just for seniors. In 2005, Social Security is expected to pay benefits of approximately $509 billion to nearly 48 million people in the United States – or roughly one out of every six Americans. In 2004, Social Security paid benefits of $493.3 billion to 47.7 million recipients.[5]

While retirees account for the largest share, Social Security actually provides benefits to three basic groups of recipients: retired workers and their spouses and dependent children, disabled workers and their dependents, and families of deceased workers. Workers are entitled to full retirement benefits if they have contributed to Social Security for at least 10 years and reach the normal retirement age, which is currently 65 for those born in 1937 or earlier and rises by increments to 67 for birthdates 1960 and later.[6] Reduced benefits are available for early retirement, starting at age 62, and there are also specific age and other requirements for eligibility for spouses and family members of workers.[7]

Seniors have the most immediate, if not the greatest, interest in the Social Security system. In 2004, of the $493.3 billion paid out in benefits, $415.0 billion or 84% was for retirement ( OASI), and $78.2 billion or 16% went to disability (DI). More than nine out of ten people in the United States age 65 and older received Social Security benefits. Social Security was the major source of income (at least 50% of total income) for two-thirds (66%) of the 65-and-over age group; its benefits represented 39% of income for the 65+ set; and the program was the only source of income for approximately 22% of these seniors. It has been calculated that without Social Security nearly half of American seniors would be living below poverty lines.[8]

Social Security beneficiaries are far from randomly distributed nationwide, due to age, climate and other factors. Those of us who live in the "Sunshine State" have an enormous interest in the current political debate, since Florida is second only to California in terms of total numbers of Social Security beneficiaries and receipts.[9] When Congressional districts are ranked by numbers of Social Security recipients, the first five and a total of seven of the highest ten districts are in Florida; when the districts are sorted by numbers of beneficiaries as a percentage of the total voting age population, the first five and six districts in the top ten are in Florida; and when they are ranked by percentages of the population over the age of 65, nine of the top ten are in this state.[10] Social Security is, however, likewise a potentially incendiary issue in many other retirement areas scattered around the country.

There is also a gender bias to Social Security issues. Of all adults receiving Social Security benefits, nearly 60% are women. In general, women have fewer resources to rely on in retirement. They are less likely than men to have private pensions, and when they do, the payments are typically smaller because women still earn less on the average than men. Also, because of their lower earnings, women generally have fewer retirement savings. Finally, although the life expectancy gap may be narrowing, it is still true that women spend an average of three years more than men in retirement.[11]

B. Who Pays?
As already indicated, for 2004, with expenditures of $501.6 billion, the Social Security system had revenues of $657.7 billion, resulting in a surplus of $156.1 billion. The income came from three sources.[12]

First, the workers of this country and their employers finance most of the Social Security system. The vast bulk of the funds needed to pay Social Security retirement and disability benefits comes from payroll and self-employment taxes (sometimes known by their origin as Federal Insurance Contributions Act or "FICA" taxes).[13] Employees and their employers each pay 6.2% of earnings, and self-employed individuals pay the full 12.4%. FICA taxes have to be paid, however, only on earnings up to a cap or ceiling, which for 2005 is $90,000.[14]

The second highest source of income for the Social Security system is interest on the trust funds. When payroll taxes and other revenues come in, the government does not pile them up in a basement s omewhere but rather allocates them to appropriate (if largely fictitious) trust funds. Most of the money is immediately paid out in benefits, but assets not currently required are invested in special securities of the United States Treasury. These securities earn interest, which is itself paid in the form of special issue Treasury bonds. When receipts are insufficient to pay benefits, the bond proceeds are supposed to be used to meet the monthly payments. Including the $156 billion annual surplus, the OASI and DI Trust Funds had amassed nearly $1.7 trillion in assets at the end of 2004.

Third, Social Security benefits are themselves subject to federal income taxes. The tax is imposed on taxpayers with incomes exceeding a specified base amount. The floor is $25,000 for single persons and married individuals filing separately and living apart, $32,000 for married couples filing jointly, and $0 for couples living together but filing separately. In certain circumstances, up to 85% of benefits may be taxed.[15]

C. How Is the System Financed?
So far, all of this sounds fairly straightforward. Yet many Americans, including many members of Congress, are confused about how the Social Security system actually works – and with good reason! The system is, in fact, riddled with anomalies and legal and accounting fictions.

On the one hand, as repeatedly emphasized by politicians and others, Social Security is a "pay-as-you-go" system. Most payroll revenues are spent immediately upon receipt -- mostly to provide current benefits, but for other purposes as well. There is no real funding of future benefits, and no money is stashed away to meet commitments. On the other hand, most pay-as-you-go arrangements do not have trust funds or other advance-funding arrangements (real or notional), since there are no excess funds available and no investments to be made. But in this country, Social Security revenues have exceeded expenditures since the mid-1990s and are expected to do so for many years into the future. In consequence, Congress has created "trust funds" that essentially contain illusory assets. The trustees do not actually handle any money; they do not collect taxes or pay benefits or expenses (all of which is managed by the United States Treasury). Instead, as already mentioned, the trust funds are composed of special-issue, non-marketable government "bonds," which bear little resemblance to those sold to the public. These bonds cannot be traded or used to pay for anything, have an identical issuer and holder (akin to an IOU by the government to itself), and are not officially included in the national debt. What they represent, in essence, is a covenant between the government and the American public.[16]

Some other countries, beginning with Chile in 1981, have created programs requiring workers to save for their own retirement through private investment accounts.[17] While the United States has not gone in this direction, we do have substantial tax incentives for creation of supplementary Individual Retirement Accounts, 401(k)s and the like. Meanwhile, Social Security itself has remained, in essence, a complicated social insurance program based on bonds of trust ("sacred trust") between the federal government and the national workforce in a democratic society.

Then what is the so-called "lockbox" occasionally bandied about by politicians? The issue of spending Social Security money for general government operations arose during the 2000 Presidential election campaign. Vice President Al Gore denounced the practice and proposed securing all payroll tax revenues in a "lockbox" to be used only to pay Social Security benefits. Not to be outdone by a Democrat, President Bush also promised early on to "keep all Social Security money in the Social Security system, where it belongs" and to "make sure the retirement savings of America's seniors are not diverted in any program." Nevertheless, few members of the Fourth Estate were shocked when Mr. Bush acknowledged at a press conference some four years later that "right now, we're paying for a lot of programs other than Social Security with the payroll tax coming in, thereby leaving a pile of IOUs."[18]

D. Is Social Security Going Broke?
It can hardly come as a surprise that increasing numbers of "babyboomers" are soon going to be retiring. Also, in theory, it should be difficult for a pay-as-you-go system to go broke. In practice, however, the United States Social Security System is expected to encounter significant difficulties by the middle of this century.

We are all getting accustomed to alarming projections about the diminishing number of workers for every Social Security beneficiary. In 1945, there were more than 40 workers for each beneficiary. By 1950, the ratio had been cut by more than half to about 16 to 1. Today, there are 3.3 workers for each beneficiary, and by 2040 the number is projected to decline to 2. Obviously, a number of factors have contributed to the downward trend, including increasing life expectancies, which have gone up from about 63 years for males and 68 for females in 1945 to 75 and 80 today.[19] Beginning around 2010, the expected rapid decrease in the workers/beneficiaries ratio is attributable both to the large number of persons born during the "baby-boom" reaching retirement age and the subsequent period of low fertility rates resulting in fewer entrants into the work force. Besides all that, the average life expectancy of a 65-year old has risen from 13½ years back in 1945 to 17 years today.[20]

With respect to such trends and their consequences, there are two basic sets of official projections. Each year the OASDI Trustees assess the state of Social Security 75 years into the future. The 2004 OASDI Trustees Report projected that, under intermediate actuarial assumptions,[21] OASDI Trust Funds would continue to run surpluses until 2018. In 2018, expenditures would exceed payroll tax revenues for the first time, producing cash-flow deficits thereafter. Nevertheless, from 2018 to 2042, redemption of trust fund assets would allow continuation of full benefits for all qualified Social Security beneficiaries. In 2042, trust fund assets would be exhausted, but even then tax income would continue to be sufficient to pay 73% of scheduled benefits until 2078 and 68% thereafter. In their 2005 Report (after President Bush unveiled his new plans for Social Security), the Trustees revised their target dates slightly, back from 2018 to 2017 and 2042 to 2041.[22]

Shortly thereafter, the Congressional Budget Office (CBO) issued official, long-term projections of the future of Social Security, which were somewhat more optimistic than those of the Social Securities Trustees. While the Trustees set the dates for payroll taxes and assets shortfalls in 2018 and 2042, the non-partisan CBO put them in 2019 and 2052 – later revised to 2020 and 2052. Also, instead of the 73% benefits possibilities for 2042 to 2078 projected by the Trustees, the CBO report said closer to 80% starting in 2053.[23] For present purposes, the point is not the differences in the two approaches, but rather the general time frames common to both.

Social Security has come much closer to disaster in the past. Indeed, in the early 1980s a lethal combination of rampant inflation, slow economic growth, and a double benefits-indexing anomaly left the system fast approaching insolvency. For several years, Social Security had been "borrowing" against other trust funds, including disability and Medicare accounts, to pay monthly retirement benefits.[24] Faced with the imminent collapse of the system, President Ronald Reagan named a blue-ribbon National Commission on Social Security Reform, chaired by Alan Greenspan.[25] Implementing the recommendations of the Greenspan Commission, Congress passed a comprehensive set of amendments, which delayed some benefits, accelerated scheduled payroll tax rate increases, injected some previously exempted persons (including members of Congress) into the revenue pools, initiated the "trust funds" as we know them today, and for the first time imposed income taxes on up to 50% of benefits for recipients above specified earnings thresholds.[26]

As a result of these and several subsequent sets of more modest reforms, Social Security currently enjoys reserves in excess of $1.5 trillion and expected to swell to more than $6 trillion. The Trustees project that the OASDI Trust Funds will be able to pay full benefits through 2041, well beyond the upsurge of babyboomer retirees. Moreover, it might be mentioned in passing, the date the Trustees predict that the funds will run out of money has itself receded steadily, and ten years ago, they were saying 2029 not 2041.[27]

A. Bush Push for Private Accounts
In his 2005 Address, President Bush acknowledged the long lead times in the projections by the OASDI Trustees discussed above, but observed that 2018 and 2042 "are not so distant, as any parent will tell you." Even with the "60 Cities in 60 Days" tour by the President to highlight Social Security reform plans, the complete details of the Bush Administration legislative proposals are not yet available. But whether the objective is touted as "privatization" or "partial privatization" of Social Security, and whether the vehicles be termed "private" or "personal" accounts,[29] the basic elements and underlying motivations of the Bush plan seem abundantly clear.[30]

In essence, what President Bush proposes is to restructure our retirement system to allow workers under 55 to invest a portion of their payroll taxes in individual investment accounts in exchange for lower guaranteed future benefits. In other words, workers could invest in stocks and bonds funds in the hopes of greater earnings, but at the cost of reduced benefits and greater financial risks. Every dollar diverted into individual accounts plus interest at a rate of 3% after inflation would be deducted from guaranteed Social Security payments. "The way the program is structured, the person comes out ahead if their [sic] personal account exceeds a 3 percent real (after-inflation) rate of return," a "Senior Administration Official" has explained; "[s]o, basically, the net effect on an individual's benefits would be zero if his personal account earned a 3 percent real rate of return."[31]

Investments in Bush private accounts would be limited to 4% of wages from payroll taxes. In other words, the Bush plan would allow diversion into personal accounts of up to 4 percentage points or nearly two-thirds of the 6.2% of wages workers now pay in payroll taxes. Investments would be capped for the first year at $1,000 (thereafter to rise in increments of $100). The present proposal is to phase in the program over three years for workers in different age groups, beginning in 2009 for those born in 1965 and earlier. The accounts would be administered publicly through selected investment companies, and investment choices would be limited.

Basically, the Bush investment accounts would be modeled on the current Thrift Savings Plan (TSP) for federal workers. In that plan covered workers have five investment options, all mutual funds. Three are stock funds: one holding stocks of large United States companies; a second, stocks of small United States companies; and the third, international stocks. The remaining two choices are bonds funds: one with corporate bonds; and the other, Treasury bonds yielding the same interest rates as the special issue bonds currently associated with OASDI Trust Funds. As with the TSP, under the Bush plan all Social Security funds would be broadly diversified, and a worker could hold a mix of different funds. Beside the five types already mentioned, a sixth fund also is envisioned; in this new, sliding fund, the ratio of stocks to bonds would change as a worker got older, with the bond portion increasing and the stock portion decreasing. Beyond the technical details of account holdings, however, a fundamental difference between the Bush privatization proposal and the TSP is that the latter is a supplementary savings plan – an add-on to, not a substitute for, any portion of Social Security.[32]

Even with the Bush private accounts, retired workers and their dependents would continue to receive some traditional Social Security benefits, since the private accounts would represent only a percentage of retirement contributions. In the future, however, benefit levels from traditional Social Security would no longer be guaranteed in advance. Also, given the diversion of payroll taxes, the federal government would undoubtedly have to borrow extensively to pay benefits during a transitional period of phasing-in the personal accounts. Administration sources initially estimated this shortfall at about $750 billion, although most independent analysts place it considerably higher and perhaps over $2 trillion during the first decade, and the Center on Budget and Policy Priorities puts the figure at $4.9 trillion for the first 20 years.[33] Until very recently, Administration officials declined to address the touchy subject of possible benefit cuts for future retirees, to close the gap between receipts and payouts; the model on which the Bush proposal was based, however, would cut benefits by nearly 50% in real terms over the next 70 years.[34]

At a Press Conference on April 28, 2005, President Bush finally admitted that such benefits reductions were a prime ingredient of his Social Security Plan. Actually, during the televised conference, the President said cryptically that he was proposing "a Social Security system in the future where benefits for low-income workers will grow faster than benefits for people who are better off." A fact sheet issued by the White House explained, however, that the Bush proposal is "similar" to a "progressive indexing" approach developed by investment company executive Robert C. Pozen. Mr. Pozen proposed calculation of initial retirement benefits for the poorest workers (lowest 30%) on the basis of wage-indexing and for all others using price-indexing. According to calculations by the Chief Actuary of the Social Security Administration, under the Pozen model, "medium" income workers who earn average wages (about $36,500 in current dollars) all their working lives would suffer benefit cuts ranging from 16% for those retiring in 2045 rising to 28% for those retiring in 2075; "high" income workers earning 60% above average wages (about $58,400 in 2005) would face reductions ranging from 24% in 2045 to 42% in 2075; and "maximum" earners ($90,000 and above today) would see cuts from 29% in 2045 to 49% in 2075. Only "low" income workers (around $16,400 or less in 2005) would not see their benefits slashed compared with those under the present system.[35]

Workers would be prohibited from withdrawing money from, or borrowing from or against, their private accounts before they reach retirement age (except possibly in cases of disability -- although the circumstances of disabled workers, like those of spouses and survivors, have not been clarified). While not subject to invasion or burden by workers themselves, however, the accounts could be tapped into (often referred to as a "clawback") by the federal government. If in retirement the combined amount of traditional Social Security benefits plus private account payments would be less than required to remain above official poverty guidelines (currently $12,490 for a couple or $9,310 for a single person), the government would automatically take back a portion of the "private" money and convert it to an annuity.

President Bush has urged three main arguments in support of his proposed private accounts:
Here's why the personal accounts are a better deal. Your money will grow, over time, at a greater rate than anything the current system can deliver – and your account will provide money for retirement over and above the check you will receive from Social Security. In addition, you'll be able to pass along the money that accumulates in your personal account, if you wish, to your children and – or grandchildren. And best of all, the money in the account is yours, and the government can never take it away.

As will be discussed below, critics contest each of these points. But in any event, presumably the alleged virtues would apply only to retirees, since all but forgotten in this assessment is what private accounts might mean for the millions of Americans who rely on Social Security not as retired workers, but for spousal, survivor or disability benefits.[36]

A major clue as to who is really intended to benefit from the Bush plan may be found in the identity of its most enthusiastic supporters. The Securities Industry Association has spent nearly a decade promoting private Social Security accounts, and it is scarcely surprising to see that organization jump on the Bush bandwagon. Securities and investment firms have pledged to spend upwards of $70 million dollars waging aggressive and expensive advertising campaigns for privatization. Their lobbying efforts are largely being conducted behind such benevolent-sounding faηades as the Alliance for Worker Retirement Security (AWRS) and the Coalition for the Modernization and Protection of America's Social Security (COMPASS). Wall Street firms have also poured money into a number of other front groups lobbying toward the same ends, including conservative "think tanks" like the Cato Institute and the Heritage Foundation and a number of right-wing "527 groups" like the Club for Growth and Progress for America.[37]

B. Case Against the Bush Plan
Relying on the same basic sets of projections by the Social Security Trustees and the Congressional Budget Office as the Administration, opponents of the Bush proposals for privatizing Social Security insist that there is no immediate "crisis" and that the system is far from going "bankrupt." Certainly, there are defects that should be recognized and resolved before reaching critical stages. Whatever one thinks of the merits of private retirement accounts, however, the Bush proposals would exacerbate both the fiscal problems already facing Social Security and the sea of red ink in which the federal government is already immersed. Moreover, while there is surely merit in encouraging additional retirement savings, the personal accounts proposed by President Bush as a substitute for guaranteed Social Security benefits would undermine the ultimate safety net for American seniors. In sum, the argument is: "If it ain't broke, don't fix it – and don't break it either."

From the outset, some critics are highly suspicious of the motives behind the Bush plan for Social Security, particularly since the proposed "rescue" utterly fails to address the alleged crisis. Indeed, in the early years, the Bush plan would worsen the financial position of Social Security. During the transition, the diversion of payroll taxes into private accounts means at a minimum that, to maintain full benefits, the government will have to borrow as much as an additional $2 trillion -- mostly from sources in China and Japan.[38] For a country with a national debt already in excess of $7.8 trillion and a projected budget deficit for fiscal year 2006 expected again to near the $0.5 trillion range, that is hardly an encouraging prospect. In fact, the illogic of inaugurating such an expensive measure as diversion of payroll taxes to the private sector at this time seems so clear that many critics fear that President Bush knows exactly what he is doing: subverting -- not salvaging -- Social Security. In other words, critics charge, the President is using acknowledged future difficulties with the system as a guise for pushing his ideology of an "ownership society," itself a misnamed ruse for perpetuating extremist Republican control.[39]

Furthermore, the major argument by President Bush in his 2005 State of the Union Address (and elsewhere) in favor of private retirement accounts was "to make the system a better deal for younger workers." Yet it is the younger people in the workforce today who would be hardest hit by the proposal from both short- and long-term perspectives. The main objection to the Bush plan from the viewpoint of young adults is the inevitable future reduction of benefits. The only element of the Bush plan that would address projected deficits at all is a proposed switch from wage-indexing to price-indexing for calculating Social Security benefits. This revision would result in dramatic reductions in guaranteed benefits -- by as much as 50% in constant dollar terms for those entering the workforce today (and, of course, the benefits cuts will apply whether or not one chooses to invest in private accounts). Indeed, had price-indexing in force until now, the Congressional Research Service estimates that current retirees would be receiving up to 60% less in benefits.[40]

Even before their own benefits are reduced up to 49%, many more young people today are likely to end up having to support elderly relatives. The Social Security system is currently keeping nearly half of all seniors in the United States out of poverty. Furthermore, with the national debt already reaching stratospheric heights, one might ask what is another $2 trillion or so in transition costs. But it is the working men and women of today and tomorrow who will be forced to bear the consequences in terms of higher taxes, inflation, reduced government services, and then some. Then too, younger workers have voiced certain other objections to the Bush plan, including that it would introduce unacceptable risk into the Social Security retirement system, that it would render their retirement plans even more vulnerable in an age when corporate misconduct has proved rampant, and that it is murky at best as to the future of disability insurance. There have also been allegations of possible gender bias, since women still tend to have shorter work histories and lower salaries, and they would therefore have less money to put into personal accounts and be most adversely affected by proposed cuts in guaranteed benefits.[41]

Overall, the Bush partial privatization plan resembles a Trojan Horse, its superficial claimed merits masking highly destructive forces. The first selling point by the President -- regarding how his private accounts will provide retirement funds "over and above the check you will receive from Social Security" -- conveniently ignores the fact that guaranteed benefits will be reduced by as much as or more than the amount of the supplement. With regard to the second alleged attraction -- that workers may "pass along the money" to their children and grandchildren -- as already discussed, account holders may be required at retirement to purchase annuities (which, by their nature, terminate upon the death of annuitants); accordingly, to be assured of being able to pass on personal account funds, a worker should be sure to die before reaching retirement age. As to the last and most highly touted attraction about money in personal accounts -- that the government allegedly "can never take it away" – it ignores the "clawback" for annuities, the recoupment through taxes on Social Security income, and the circumstance that accruals from personal accounts would almost certainly be far outmatched by the reductions of guaranteed benefits under the Bush plan itself.

Another objection is administrative costs. The big winners with the Bush private accounts will be banks, brokerage houses and insurance companies. These financial institutions will enjoy large immediate gains from interest charges for financing the additional $2 trillion in federal borrowing for transition costs. Then there will, of course, be the matter of fees for the management of the private accounts themselves. In addition to administrative expenses incurred by the Social Security Administration, these financial institutions are expected to impose their typical administrative fees of around 2% plus a variety of other related charges (for example, for switching between various types of funds, leaving or reentering the workforce, purchasing annuities at retirement, etc.). Such costs will far exceed the 0.7% current administrative expenses for Social Security.[42]

While it was predictable that securities institutions would be the main proponents of the Bush private accounts, the opponents are more broad-based. AARP (formerly known as the American Association of Retired Persons) opposes the Bush plan, primarily due to the risk factor: "Private accounts can lose money just as fast as they can make it. And, unlike Social Security, you run the risk of outliving your savings and you lose the protection against inflation." The Alliance of Retired Americans (ARA), an AFL-CIO affiliate, has sent a "Social Security Truth Truck" loaded with petitions against privatization to the home districts of twenty Members of Congress in six states who may be influential in the upcoming floor battles. Since Social Security is especially important in keeping older women out of poverty, it is not surprising also to find the National Organization for Women (NOW) opposes the Bush proposed changes, as do the NAACP (National Association for the Advancement of Colored People) and other influential minority organizations.[43]

C. Political Calculus of Partial Privatization
Despite sinking poll numbers and growing skepticism on the subject by legislators,[44] Administration officials have continued unrelentingly to push the Bush partial privatization plan. White House Deputy Chief of Staff and political strategist Karl Rove recently insisted that "[t]he personal retirement account must be part of any action on Social Security." Achievement of this dictate seems unlikely, since Democrats in Congress are virtually unanimous in opposing the Bush proposals and they have been joined by some of their colleagues from across the aisle.

Except for Senator Ben Nelson of Nebraska, who says he has not made up his mind, every Democratic Senator is committed to opposing diversion of payroll taxes into private accounts. In the House of Representatives, the lone Democratic holdout is Allen Boyd of the Florida 2nd Congressional District. Moreover, some Republican Senators have expressed serious concerns about the Bush personal accounts. Senator Olympia Snowe (R – MD) has declared herself "certainly not going to support diverting $2 trillion from Social Security into creating personal savings accounts." Senator Lindsey Graham (R – SC) has called private accounts the "Achilles heel" of the Bush plan and charged that the accounts "are being oversold, and they will not come anywhere near being able to fix Social Security." [45] Five Republicans – Senators Snowe and Graham, joined by Susan Collins (R - ME), Mike DeWine (R - OH) and Arlen Specter (R - PA) -- joined the 44 Democrats and Independent James Jeffords (I - VT) in voting for a nonbinding "sense of the Senate" resolution, sponsored by Senator Bill Nelson (D - FL), stating that the Congress should reject any Social Security plan that would require "deep benefit cuts or a massive increase in debt."[46]

In the House of Representatives, Republican numbers are stronger, but there is a notable lack of enthusiasm for the Bush partial privatization plan. Republican House Members representing districts with high numbers of constituents dependent on Social Security, particularly on the Florida delegation, are balking or equivocating on personal accounts. Party stalwart Congresswoman Ginny Brown-Waite, who represents the Florida 5th Congressional District with the highest percentage of Social Security recipients (a quarter million strong, or nearly half of the voting age population), cannot bring herself to support Bush private accounts; "[t]he president has not done a great job in selling this plan," Ms. Brown-Waite admits, and ''[s]eniors are petrified that their Social Security that they've come to depend on . . . will be impacted in some way." Even Bush acolyte Katherine Harris, former Florida Secretary of State and current Congresswoman for the Florida 13th, promised voters during her 2004 campaign that she "do[es] not support the privatization of Social Security"; post-election, however, she is waffling somewhat, declaring herself "waiting to see more details about the president's plan" before she commits one way or the other. Clay Shaw (R -- FL 22nd), whose district also contains a high number of voters over age 65, has also openly differed from the Administration plan. A number of other Republicans – for example, Sherwood Boehlert (R -- NY 24th), Shelley Moore Capito (R -- WV 2nd), Jo Ann Emerson (R -- MO 8th), Candice Miller (R -- MI 10th), Joe Schwarz (R -- MI 7th), Rob Simmons (R -- CT 2nd), and C.W. Bill Young (R -- FL 10th) – have also intimated at least reservations about private accounts. On the Democratic side, to repeat, the only apparent possible defector who would consider diverting any portion of payroll taxes to private accounts seems to be Allen Boyd (D -- FL 2nd).[47]

A. Increase Social Security Revenues
For increasing Social Security system revenues, by far the most promising proposal at this time is to raise the contribution and benefit base or "cap" from the present $90,000. Several other proposals are, however, also under consideration at this time.

1. Raise the Contribution and Benefits Base ("Cap"). Raising the cap on maximum earnings subject to payroll taxes from the current $90,000 appears both politically and fiscally viable. In the 1983 Reagan era Social Security reforms, Congress set the contribution and benefit base to cover 90% of wages. But top earners today have a larger share of the income pie, and the portion subject to payroll taxes has fallen to about 85% of wages.

AARP favors returning to the 90% earnings level by raising the cap from $90,000 in 2005 to $140,000, phased in over a decade. This action alone would, according to AARP calculations, lower the projected Social Security shortfall by 43%. Senator Lindsey Graham (R – SC) has gone even further in this regard, proposing a raise to $160,000 (although along with a number of other revisions). Eliminating the cap and equalizing Social Security taxes so that all Americans paid the same rate would result in enough additional revenues to enable the system to pay full benefits at least until the 22nd century.[48]

Raising the cap is clearly the most popular, most fiscally sound and least socially disruptive solution to the problems of Social Security – at least for the next 75 years or so. Even President Bush has not ruled out this fix, claiming that he would "welcome any idea -- except running up the payroll tax rate."[49]

2. Raise the Payroll Tax Rate. On the other hand, the idea of raising the payroll tax rate beyond current 12.4% appears to be a political non-starter at this time. President Bush and leading Republicans have flatly rejected it, and no Democrat has come forward to favor a tax rate increase. The general consensus seems to be that with 12.4% already an all-time high, lifting the rate any higher would place unacceptable burdens on employees, employers, and the self-employed.[50]

3. Raise Taxes on Social Security Benefits. Since up to 85% of Social Security benefits may be subject to federal income tax, there is not much room for further adjustment of the ceiling, even were this idea to garner much political support. As things now stand, just the opposite is under consideration, and two bills currently pending in Congress would roll back the maximum tax rate raise from 85% set in 1993 legislation to the 50% level of a decade earlier.[51]

4. Extend Coverage to State and Local Government New Hires. Another step that would raise the revenue base would be to make Social Security universal. At present, about 30% of all state and local government employees are outside the system. Some experts have suggested that extending coverage to newly-hired state and local government employees could make up for as much as 10% of the projected shortfall. Considerations of fairness and equity also mediate in favor of universal participation. On the other hand, not only might the public employees object for fear of losing protections, but also some state and local governments might well balk at having to pay their resulting share of the payroll tax.[52]

5. Invest Trust Fund Assets in Indexed Funds. Even some opponents of Bush personal accounts have indicated they could support investment of some portion of the Social Security Trust Funds in stock market indexed funds. Most notably, AARP has suggested amending the law to allow the Trustees to invest up to 15% of reserves in broad index funds. Such limited investment would be a way of yielding higher returns, with minimal risk to the Trust Funds and no risk to individual workers. Apart from the prospect of considerably lower administrative costs, the OASDI Trustees could ride out market swings much better than individuals, who might have to retire during a market downswing. On the other hand, given the magnitude of the resources involved, the government could be put in the position of manipulating markets or being accused of doing so.[53]

B. Decrease Retirement Benefits

1. Substitute Price-Indexing for Wage-Indexing of Benefits. As discussed earlier, initial Social Security benefits are currently determined by a number of factors, including length of time worked, amount paid in, and general rise in average wages over time. As part of the Bush plan, the basis for calculation of initial benefits would be changed from a wage index to a consumer price index (CPI). Since prices generally rise more slowly than wages, switching to price-indexing (or, conceivably, developing some sort of blended index) would result in large benefits deductions for future retirees. Indeed, the Congressional Research Service has calculated that, had price-indexing been in effect since 1940, poverty rates among seniors would be three times what they are now – placing tremendous burdens on other public assistance programs and on younger generations who care about their parents and other relatives.[54]

2. Adjust COLAs. Social Security cost-of-living adjustments (COLA) are now calculated on the basis of price inflation (price-indexing). The Bureau of Labor Statistics has developed an alternative version of the CPI -- called the "chained" or "chain-weighted" index – whose use would result in slightly lower COLAS. Federal Reserve Chairman Alan Greenspan has recommended adoption of this new index as a cost-cutting measure.[55]

3. Raise Retirement Age. Senator Chuck Hagel (R – NE) has introduced a bill that, in addition to including a version of Bush personal accounts, would raise the Social Security retirement age from 67 to 68 in 2023. The early retirement age would remain 62.[56]

C. Address Perceived Inequities
In the context of revising Social Security, Congress may also wish to review certain existing inequities within or associated with the system. Ending discriminatory treatment may have adverse financial consequences, but such a step would at least serve the purposes of equal treatment and would cost a small fraction of the Bush proposals.

1. Eliminate Government Pension Offset (GPO) and Windfall Elimination Provisions (WEP). The Government Pension Offset (GPO) and the Windfall Elimination Provisions (WEP) were enacted two decades ago as part of the Reagan Social Security reforms. The GPO and WEP reduce and in some cases wipe out Social Security retirement benefits for federal, state and local civil service employees, and they are thus discriminatory in comparison with treatment of workers in the private sector. There are bills currently pending in both the Senate and the House of Representatives to correct this inequity by repealing the GPO and WEP.[57]

2. End Discrimination Against "Notch" Babies. While most Americans are now aware of the "babyboomer" challenge to the Social Security system, few know of the problem of the "Notch babies," persons born after 1917 but before 1922. As part of the 1977 Social Security Act Amendments, Congress "grandfathered," or retained the old benefit calculation formulas for persons born between 1911 and 1916, while actually reducing them for persons born in the period 1917 through 1921 (some say 1926). Accordingly, Notch babies are said to receive an average of 20% less in Social Security than persons born in 1916 or before or 1922 or thereafter. While some organizations (including AARP) have questioned whether reform is warranted or affordable, there is legislation pending in Congress to correct this discrimination against Notch babies.[58]

3. Remove "Marital Penalty" for Social Security Recipients. In recent years, Congress has eliminated many instances of the so-called "marriage penalty" disadvantaging married couples as compared to two single individuals. The marriage penalty remains, however, very much alive for Social Security recipients. As indicated earlier, the "base amount" beyond which income tax is assessed on Social Security benefits is $25,000 for singles and $32,000 for a married couple. Legislatively speaking this may be a "tax" as distinct from a "Social Security" issue, but however technically classified, it affects the fundamental fairness of the latter system.[59]

D. Revise Premises of the Social Security System
It is, to put it mildly, highly unusual for legislators to be so concerned about an alleged "crisis," not anticipated to change anything for at least another 35 years. Indeed, as discussed earlier, during the Reagan Administration nothing was done until Social Security was mere weeks from bankruptcy. Moreover, at present the projected shortfall for the next 75 years is smaller than the shortfalls covered by adjustments to the system in the 1950s, '60s, '70s, and '80s. It is also about one-third the size of the tax cuts enacted during the Bush Administration. Then too, the country is currently embroiled in extremely costly ventures in Iraq and Afghanistan to the tune of more than $300 billion, and we are faced with prodigious deficits and a national debt of unprecedented proportions. In the circumstances, it may seem surprising that the Bush Administration is urging fundamental changes to Social Security involving perhaps $2 trillion or more in transition costs. Nevertheless, these and other far-reaching revisions that would alter premises of the existing system are currently before Congress.

1. Substitute Bush Private Accounts. Even the Bush Administration cannot dispute that the personal accounts being promoted to the American public will do nothing to alleviate any financial problems for Social Security or its beneficiaries for the foreseeable future. Quite the contrary, such partial privatization will likely generate an additional $2 trillion in transition costs. This tremendous new burden will be added to the intergenerational transfers already imposed on young workers by a $7.8+ trillion national debt; and it will also increase the vulnerability of this country, since nearly 30% of that debt is held by foreign creditors (primarily from China and Japan). Indeed, the President has come close to acknowledging the disconnect between the problem purportedly addressed and his proposed solution. At least he "fully recognize[s] that the personal retirement account is not the only thing needed to solve Social Security permanently." In fact, this measure would have to be accompanied by huge cuts in guaranteed benefits to come anywhere near being fiscally manageable, a significant detail repeatedly omitted from the Bush sales pitch.[60]

2. Address Social Security in Context of Tax Reform. Also altering systemic assumptions, two proposals have been floated to address Social Security issues in the context of general tax reform. First, instead of getting rid of the estate tax entirely, as the Bush Administration advocates, the tax could be retained at the level set for 2009, when under current law only estates valued at $3.5 million or more ($7 million for a couple) will be taxed. Amounts equal to the proceeds could then be transferred to the OASI Trust Fund. Rep. David Obey (D – WI 7th) has introduced legislation to this effect, and AARP supports this approach.[61] And second, the Chairman of the House of Representatives Ways and Means Committee, Bill Thomas (R – CA 22nd), wants to impose a value added tax (VAT) on imports into the United States.[62] There is also, obviously, the option of dedicating a portion of general government revenues to Social Security.[63]

E. Promote Retirement Savings
While Social Security may not be in "crisis" in the traditional sense of imminently impending doom, there is little doubt that some adjustments need to be made. Meanwhile, the fact remains that the system was never intended to be the sole support of senior citizens, but rather to serve as an ultimate safety net. Since Americans are living longer and more active lives, Congress would do well to look beyond preserving the Social Security system to promoting additional retirement saving by the American public.

1. Allow Add-On Accounts. While many Democrats, Republicans and others adamantly object to the Bush proposal to allow diversion of payroll tax proceeds, this stance does not mean they necessarily oppose additional personal accounts financed by other means. Indeed, some Bush critics are promoting an alternative of "Social Security plus" accounts, which "add-on" (as distinct from Bush "carve-out") accounts could be mandatory or voluntary. These add-ons would differ both from the Bush proposal and from existing individual retirement accounts (§401[k] plans and IRAs): on the one hand, unlike the Bush personal accounts, they would be funded by additional assessments or voluntary contributions, rather than by diversion of FICA taxes; on the other hand, as distinct from current tax incentive plans for workers in the private sector, they would be run through the Social Security Administration or other government apparatus. Proponents argue that add-ons would afford account holders the advantages of additional investment expertise, larger risk pools and lower administrative costs.

In March 2005, 43 Democratic Senators (all but Ben Nelson of Nebraska) and the Independent (Senator Jeffords) sent a letter to President Bush opposing carve-out accounts, but indicating openness to negotiation on add-ons that "would be established entirely separate and apart from Social Security." Congressman Clay Shaw Jr. (R – Florida 22nd) has introduced a bill featuring a variant of this idea (called "Social Security Guarantee Accounts"), and Senator Orrin Hatch (R -- Utah) has come forward with another plan (featuring "Personal Unlimited Retirement Security" or "PURSE" accounts) with dollar-for-dollar matching by the federal government. Not a new notion, a variation of add-on accounts was proposed several years ago by President Bill Clinton and later endorsed by Vice President and candidate Al Gore during his 2000 Presidential campaign. Versions of the idea have won endorsement from as diverse quarters as AARP and Federal Reserve Board Governor Edward Gramlich.[64]

2. Cease Looting Social Security Trust Funds ("Lockbox"). Finally, the federal government may take action to get its own house in order – to cease mortgaging the future and to restore federal fiscal responsibility. In more formal terms, the goal would be not only to reduce unified deficits (although such measure would be a major improvement over current fiscal practices), but also to balance annual on-budget accounts. More bluntly put, cease looting Social Security reserves for ongoing government programs, and stop using committed Social Security surpluses to justify tax cuts or spending increases for normal government operations. If the reserves were instead used to redeem outstanding debt, there would be less debt burden for the government and future workers when the Social Security system stops running surpluses and begins relying on the trust funds (around 2018, not 2041 or 2042). This proposal is a variation of the "lockbox" proposal; and however fictional the notion of a repository for largely illusory "trust funds," the concept is useful in promoting fiscal integrity.[65]