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AARP determined to protect Social Security

Puerto Rico chapters offer education on the federal retirement benefit as part of its nationwide community-service program


May 20, 2005
Copyright © 2005 CARIBBEAN BUSINESS. All Rights Reserved.

As part of the American Association of Retired Persons’ (AARP) day of service celebrated last week, Christopher Hansen, AARP associate executive director, visited Puerto Rico to assist the local chapters in educating the public about Social Security issues. In particular, the association is attempting to raise awareness about the program’s solvency challenges and lobbying against the reform concept proposed by President George W. Bush.

Before joining AARP in 2003, Hansen worked for 16 years for Boeing Co. and was known as a broad-viewed political strategist with ties to the Democratic and Republican parties. Considering his experience in government relations, the political debates about Social Security are familiar territory for him.

The debates stem from President Bush’s informal proposal to create voluntary private accounts, using a portion of Social Security taxes to allow beneficiaries to secure more retirement money. However, AARP is completely opposed to any proposal that doesn’t include solvency for the system. "We aren’t opposed to private accounts; we are opposed to financing private accounts by diverting money from the Social Security tax base because [this change] moves [the system] away from solvency." The association would favor add-on accounts, such as the federal Thrift Savings Plan, in which people contribute to investment accounts in addition to their retirement plans.

José Acarón, AARP Puerto Rico state director, pointed out that the creation of private accounts could have a negative impact on the island’s economy as a whole. "Puerto Rico received $384 million in 2003 from Social Security, so any reduction could affect the island’s economy," said Acarón, adding that more than 50% of Social Security beneficiaries on the island have no other source of income.

Hansen explained the president’s proposal could hamper the current system’s progressive benefit formula, which allows lower-wage workers to receive higher returns than higher-income workers. "As it is, people in Puerto Rico, compared to others in the entire program, contribute less to the program and get more out of it; they get a higher replacement rate. When you take money out of the system and put it into an investment account, you don’t know what you are going to get, so you automatically take away the progressivity," Hansen explained.

On the other hand, he also explained that in a recent press conference, President Bush proposed making the system more progressive than it currently is. Hansen pointed out that this could be a potentially dangerous move. Under current law, cost-of-living adjustments are based on the consumer price index (CPI), which tends to be lower than the growth of wages. One of the options mentioned by the president would allow lower-income workers to base the cost-of-living adjustment on wages, while higher-income workers would still index it based on the CPI, with anyone earning more than $120,000 paying an additional percentage on all income. "It basically would change the nature of the whole program from being a retirement income-security program to more of a welfare program, and frankly that is a harder sell to the American public," he stated.

As part of the nationwide education effort, AARP launched a massive $5 million advertising campaign attacking the president’s private-account proposal, describing it as too risky. Hansen believes the association’s campaign has strengthened public opinion against the idea, and even a number of Republicans have quietly supported their efforts. "We have Republicans, who a lot of people assumed would vote for this [proposal], privately thanking us for our opposition because they don’t want to have to walk that plank; they don’t think it is a good idea, and they don’t want to be blamed for it," Hansen said.

While AARP has been busy attacking the private- account proposal, it also has been the subject of attack by a number of groups. They have accused the association of unfairly denouncing the plan’s market-risk factor while also endorsing a number of investment products.

In response, Hansen explained, "Basically, [the AARP investment products] aren’t for the same purpose. We are trying to encourage people to invest and save, but we see that as something in addition to Social Security. We want them to have other incomes when they retire, but we don’t want them to do that instead of Social Security," Hansen stated, adding that in the mainland U.S., if Social Security were taken out of the retirement equation, more than 50% of senior citizens would be living below the poverty line.

Although the association has refrained from admitting the system is presently in crisis, or from directly advocating any specific reform measures, it has presented a number of alternatives to solve the system’s long-term solvency issues. Among them, Hansen pointed out, the most popular is the idea of raising the taxable salary cap from $90,000 to $140,000 over a 10-year period. This measure would lower the system’s shortfall by 43%, according to Social Security estimates. Opponents maintain this would constitute a tax increase, one to which employers in particular may object.

Another option would be to raise the 12.4% Social Security tax by a half-percentage point, which would mean employers and employees would each pay an additional one-quarter of a percentage point. The estimate presented calculates the system’s shortfall would be reduced by 24% through this measure.

One very unpopular option, according to Hansen, is increasing the age at which full benefits can be received. That age presently varies between 65 and 67; it has been suggested that the age be raised to 70. This option supposedly would lower the shortfall by 38%. Proponents of the idea refer to prolonged life-expectancy estimates, while opponents view it as a reduction of benefits.

Diversifying 15% of the Social Security Trust Fund into a market-index fund would reduce the shortfall by 15%, according to estimates, while reducing benefits for new retirees by 5% would lower the shortfall by 26%.

Despite his very public support of the private-account system, President Bush hasn’t presented a formal reform proposal. While his informal proposals continue to vary and accommodate different options, AARP is leaving no room for compromise when it comes to the private-account option and vows to continue to look out for the system’s solvency for the benefit of future generations.

This Caribbean Business article appears courtesy of Casiano Communications.
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