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More insecurity about Social Security reform

Social Security personal-account proposal ignites strong debate nationwide


February 17, 2005
Copyright © 2005 CARIBBEAN BUSINESS. All Rights Reserved.

Is it a real reform or a game of roulette? That is the question surrounding the reform proposed by President George Bush for the Social Security program. The retirement of the baby-boomers generation is projected to push the program onto a bumpy road toward bankruptcy. According to the Social Security Board of Trustees, as early as 2018 the program will start paying out more benefits than it receives through payroll taxes. If the program isn’t reformed, by 2042 the Trust Fund will be depleted. The Congressional Budget Office gives the program a few more years, predicting it will remain solvent until 2052. Although many may think that the issue doesn’t warrant immediate attention because of these seemingly far-off dates, President Bush is determined to reform the program and plans to make it one of the milestones of his second term. During the first State of the Union address for his second term, Bush dedicated more than 25% of the speech to the topic of Social Security. The next day, he took off on a two-day, five-state tour to promote his proposal.

Bush’s interest in Social Security reform goes as far back as his campaign in 1978 for the Texas seat in the U.S. House of Representatives. However, it wasn’t until after he became president that he ordered a committee to prepare several reform models for the program in 2001 and, of the three that resulted from the study, it was the one referred to as Model 2 that garnered the most support from the president and his party. This model would allow employees to divert four percentage points of their 12.4% annual Social Security payroll tax into private accounts, up to a maximum of $1,000 a year. The workers would then be able to chose to invest in five different options: large cap funds, small cap funds, international funds, corporate bonds, and Treasury bonds. The accounts would be managed by private companies. Participants would be strictly voluntary and wouldn’t be allowed to withdraw money from the account until retirement. The account funds could later be passed on to family members as inheritance if so desired. According to the plan, the accounts would start in 2009 for those born before 1966, in 2010 for those born before 1979, and in 2011 for everyone else. Those over the age of 55 and the disabled wouldn’t be affected by the reform. What hasn’t been made clear up to the moment is how many benefits will be cut off for the participants of the personal accounts, and how the cost of the transition process would be covered.

White House figures show that implementing the plan could require an investment of $754 billion over the initial 10-year period. This sum is necessary to make up for the payroll taxes that would be going to the personal accounts, rather than to the Social Security fund, which is used to pay out current beneficiaries. Other estimates believe the sum could reach $2 trillion during the initial period and $3.5 trillion for the next 10 years. Supporters of the reform model suggest the investment would pay for itself down the road by allowing the government to gradually cut back on benefits.

Senate Democrats, however, presenting themselves as "a unified caucus," said that expanding the deficit to create private accounts is "immoral, unacceptable, and unsustainable." Sen. Harry Reid of Nevada spoke out against the president’s proposal. "Democrats are all for giving Americans more of a say and more choices when it comes to their retirement savings, but that doesn’t mean taking Social Security’s guarantee and gambling with it. And that’s coming from a senator who represents Las Vegas," said Reid. While for the most part Democrats have joined against the personal accounts, Republicans have yet to consolidate their front. However, the White House has reportedly already been assembling a coalition of allies that will privately raise $35 million for an advertising and lobbying effort. Their mission will not be easy though, as opponents of the reform are rumored to also be in the process of collecting a combined $50 million for advertising against Bush’s proposal.

Among the most rampant opponents is the American Association of Retired Persons (AARP), which has already launched a $5 million ad campaign against private accounts. The message of the ads is that private accounts are a gamble, subject to the market’s ups and downs, and retirement isn’t something to gamble with. State Director of AARP Puerto Rico, José Acarón, pointed out that this message should be even more poignant for Puerto Ricans. "In Puerto Rico, 48% of the population lives under the poverty level and, for a majority of them, their only source of income is the monthly Social Security checks. It is even more important for us to keep the program stable and safe, it can make the difference between the dignity and the insolvency of our people," emphasized Acarón. The director expects the 35 local AARP chapters and 80,000 members on the island to join in the campaign against personal accounts as early as this week. Several members of the group have traveled to the U.S. mainland to receive training on how to best get the message out. Pamphlets and other materials explaining the possible consequences of the proposal were in the process of being translated into Spanish for this purpose. Acarón pointed out that AARP doesn’t believe the Social Security program is as bankrupt as President Bush implies. AARP believes the so-called privatization is too risky, and that the past stock market crashes prove the possible risks involved in private accounts.

The group does support more moderate reforms for the program’s future solvency such as raising the taxable cap from $90,000 to $140,000, increasing employee contributions, diversifying the investment of the funds, and getting all public employees included in the program. "Basically, privatization is taking money out of the fund. What we have to do is fortify the program, not weaken it. I wouldn’t like my future to depend on a gamble," said Acarón, adding that the group is asking everyone to get in touch with Resident Commissioner Luis Fortuño to let him know their opposition to the proposal.

For his part, Fortuño is crystal clear on one point concerning the urgency of the Social Security reform, "For Puerto Rico, this is a priority; many people on the island depend on that monthly check. We do have an issue on our hands, I am convinced of that," emphasized Fortuño. However, contrary to the AARP’s stance on the issue, Fortuño said that he would agree with the creation of the personal social security accounts as proposed by President Bush. "I believe in giving control to the people; in this case the control would be limited because we are dealing with people’s retirements, but it is control just the same," explained Fortuño speaking of the benefits of the particular proposal. One of the points he was most emphatic about was the fact that the personal accounts would be completely voluntary, which would give people the choice of abstaining from the personal account system if they considered it too risky. When asked about the concerns of the AARP, Fortuño said he is a firm believer in the rights of retirees, but that he is also vigilant of the interests of future beneficiaries who will suffer if a proper reform fails to aid the system. Fortuño also pointed out that neither President Bush nor the Republican party has settled on a formal proposal, leaving the discussion open for compromise among different reform models.

Being opposed to the personal-account system, executive director of Puerto Rico’s Federal Affairs Administration, Eduardo Bhatia, should be looking forward to those future compromises. "If Fortuño agrees with the personal account proposal, we may have a discrepancy, but I hope we can work together for the benefit of Puerto Rico’s retirees," explained Bhatia. His main concern was that the personal account reform could in some way affect the formula currently used by the Social Security program to calculate benefits. The current system uses a progressive benefit formula, which means it intentionally returns a higher percentage of wages to lower and average wage earners than it returns to those of higher earnings.

According to the Center for American Progress, Social Security replaces about 57% of lifetime average wages for low-wage workers, 42% for moderate-wage workers, and 36% for high-wage workers, providing they retire at the normal retirement age. Puerto Ricans living both on the mainland and on the island benefit from this model because, in general, they earn less than other groups of Americans during their working years.

The fact that 17.5% of the population in Puerto Rico receives Social Security benefits compared with 15% on the U.S. mainland further emphasizes the importance of a fair reform according to Bhatia, who points out, "The current formula applies income redistribution. Personal accounts could change that. Approving President Bush’s proposal could be detrimental to the people of Puerto Rico for this reason." However, Fortuño doesn’t believe the personal account reform would affect the progressive benefit formula. What both leaders do agree on is the urgency and the necessity of a proper reform for the program. "I believe the president has outlined a real problem with the Social Security system. However, there is no consensus, not even among Republicans, as to how to solve the problem. Therefore, I have the task of closely following all of the proposals being discussed and analyzing the potential impact on Puerto Rico’s 700,000 Social Security beneficiaries," concluded Bhatia.

Although more insecurities and debate are bound to arise around the Social Security issue, President Bush’s openness to dialogue at this point should be a comfort to all concerned. During a radio address on Feb. 5, the president had this to say: "Fixing Social Security will require an open and honest revision of the options. I will listen to anyone who has a good idea, I will work with the members of Congress to find an effective combination of reforms." However, he did immediately throw out some of the options, adding, "We will not increase payroll taxes… we will make the system better for young workers, allowing them to put part of their payroll taxes in the form of voluntary personal accounts for retirement, savings they will be able to call their own and that the government will never be able to take away." Future congressional meetings will surely test the strength of these words.

This Caribbean Business article appears courtesy of Casiano Communications.
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