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Primer on President Bush’s “Plan” for Social Security Privatization

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President Bush has never spelled out a detailed plan on how he would like to reform Social Security; in fact, his "plan" seems to shift every couple of weeks. However, his advisors have released several details and general ideas that may ultimately form the basis for his final plan to privatize Social Security, although the final proposal remains unknown.

What President Bush has proposed so far would mean massive benefit cuts for America’s middle class – possibly with more to come – and huge new government deficits to finance the carving up of Social Security to create privatization accounts.

There are two separate issues at stake here: Social Security solvency (bringing into balance Social Security revenue and payments) and the creation of privatization accounts, which would divert a substantial share of payroll taxes away from Social Security.

In connection with the President’s State of the Union address on February 2, 2005, the White House released some specifics of the president’s plan for privatization accounts:

  • Bush Would Create Private Accounts. Starting in 2011, all workers could divert a third of their payroll tax, or 4 percent of their earnings, up to $1,000 per year, into a privatization account.
  • "Clawback" Would Eat Into Any Gains In Accounts. Upon retirement, workers would be subject to a "clawback" and would have to repay the money diverted into private accounts, plus interest, plus inflation, through automatic reductions of their guaranteed benefits. The total interest rate would be 3 percent above inflation annually. Unless the amount in their accounts grew by more than 3 percent plus inflation, the "clawback" would take away all (or more than all) of the value of the account.
  • Private Accounts Would Force Trillions in New Borrowing. Under Bush’s plan, money that was earmarked to pay current beneficiaries would no longer be available, requiring the government to borrow trillions of dollars to allow Social Security to pay for promised benefits. Without this borrowing, benefit cuts to current retirees would have to be made.
  • Bush’s Plan Would Worsen Social Security’s Financial Outlook. Accounts could be passed on in the event of a worker’s death or split in the case of divorce. In those cases, Social Security benefits would not be automatically reduced to recoup the money diverted away from Social Security, presenting a net loss.
  • Investment Choices Would Be Limited. Workers could invest in five index funds, but it is unclear who would decide upon these choices or how the options would be determined. At higher ages, investments would be allocated to lifecycle funds that reduce the share of stocks with age, unless workers opt out of those funds. Upon retirement, workers would be forced to convert enough of their accounts into lifetime annuities to have a benefit equal to at least the poverty line.

On April 28, the White House provided some details on how President Bush plans to address Social Security’s solvency:

  • Bush Would Address Solvency Solely by Cutting Benefits. President Bush has ruled out the possibility of payroll tax increases, and has suggested no other increases in funding. The White House has also apparently retracted its support for raising the cap – currently set at $90,000 – above which earnings are no longer subject to Social Security taxation.
  • Benefit Cuts Would Come Through a Change in the Benefit Formula. Currently, benefits and tax contributions grow at the rate of wage growth. For new beneficiaries earning $90,000 in 2005, initial benefits under the president’s outline would rise slower than the amount of taxes contributed, and only at the inflation rate. For people earning between $20,000 and $90,000 in 2005, initial benefits would grow above the rate of inflation, but below the rate of wage growth and tax contributions.
  • Bush’s Benefit Cuts Would Affect 70 Percent of All Taxpayers. Benefits would be cut for everybody making more than $20,000 in 2005. For an average wage earner retiring in 2075, the cuts would equal 28 percent. For workers whose wages are 60 percent above the average – currently $59,000 – the cut would be 25 percent if they retired in 2045 and 42 percent if they retired in 2075.
  • More Benefit Cuts Down the Road under Bush’s Plan. The president’s proposal still requires further massive benefit cuts, since the change in benefits does not cover the full imbalance in Social Security. President Bush’s proposal to massively cut middle-class benefits will cover only 57 percent of the projected shortfall. To address the full shortfall, he would have to further cut retirement benefits or cut disability benefits as well.

Christian E. Weller is senior economist at the Center for American Progress.

For more on information read the Rebuttal of the White House’s Spin on Benefit Cuts and visit our Social Security homepage.

 

 

 

 

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