Term Paper: Current Policy Issue Faced by the Upcoming Texas Legislature

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Social Security Reform:

The Bush Plan & Opposition to the Bush Plan

What is the Bush Plan?

According to a posting on the White House Web site, the Bush Administration explains: "As we fix Social Security, we must make it a better deal for our younger workers by allowing them to put part of their payroll taxes in personal retirement accounts."

The White House Web site asserts that in three years from now baby boomers will start to retire and file for Social Security, but if America does not act to "fix Social Security now, the only solutions will be dramatically higher taxes, massive new borrowing or sudden and severe cuts in Social Security benefits or other government programs."

In 13 years, the White House argument continues, the government will be paying out more in Social Security benefits "than it collects in payroll taxes." And by 2027, 22 years from now, Uncle Sam will be dipping into his pockets for "an extra $200 billion a year" just to keep the Social Security system from sinking. That $200 billion will turn to $300 billion a year by 2033, and by 2042, when employees now in their mid-twenties are going to be retiring, "the system will be bankrupt."

The Bush "plan," such as it is laid out online, boils down to a succinct five bullet points: a) "personal accounts" would be voluntary; b) your social security money would be invested in a "conservative mix of bond and stock funds" which, the White House asserts, "would have the opportunity to earn a higher rate of return that what is being provided now; c) a young person who earns about $35,000 annually would realize "a quarter million dollars" of savings in his or her "own account upon retirement"; d) that little nest egg would supplement the worker's "traditional social security check"; e) the "empty promises" of the present system would be replaced by that quarter of a million dollars.

Beyond the justifications offered earlier in this paper, why is President George Bush pushing hard for his plan to have social security recipients divert their federal retirement money to private accounts; what are others saying about the Bush Social Security plan?

According to an article by the Washington Bureau Chief of the Sunday Denver Post (Farrell, 2005), John Aloysius Farrell, on March 13, Bush has only "described how a system of personal retirement accounts might operate," but, the Post continues, Bush "has not offered a way to make the system sound."

Farrell's story notes that "even administration officials acknowledge that private accounts won't make Social Security whole." "Personal accounts alone won't solve the problem," according to Kent Smetters, a Wharton School of Business associate professor, quoted in the Post story. "By being specific on personal accounts yet vague on the reforms that are needed to reduce Social Security's deficits, the president appears to want credit for bring the melted cheese," Smetters continued, "but not the spinach that the cheese is intended to cover." few facts about Social Security, courtesy Farrell's article, include: a) the trustees of the Social Security Administration in Washington D.C., say the government needs to "either raise" $3.7 trillion over the next 75 years, "or cut retirement benefits"; b) more than 47 million people now collect benefits, "including 30 million retirees, 6 million disabled Americans, and 11.6 million family members of workers who have retired, become disabled, or died"; c) two-thirds of older people (elderly) presently rely on Social Security for "at least half of their income"; d) for 20% of retirees, Social Security "is their only income"; and e) the Social Security system is funded through the payroll tax called FICA, and 6.2% of a worker's first $90,000 in wages is taxed for Social Security.

The Social Security program presently distributes about $500 billion a year, and has about $150 billion in surpluses, according to the Post article. In fact, there is about $2 trillion in the Social Security reserve fund, from which a large portion of federal spending is "borrowed" once the government is in deficit spending, which it is now, to the tune of "a $7 trillion national debt," Farrell. How that "borrowing" is done is the government takes the funds that Social Security invests in Treasury bonds, and spends it. The Bush administration has spent some $400 billion of those Social Security funds, on the war in Iraq and other issues and projects.

In Farrell's article, he quotes Democrat presidential nominee Senator John Kerry as saying that "America needs to understand: benefits are going to be cut to fix a problem based on varying assumptions."

Meantime, there is a dramatic "downside" to doing "nothing," the Post piece asserts. The "mess that Congress and the president have made" of the federal budget contributes to the pressure on government to repair Social Security before its flat broke. "The Bush tax cuts, increased federal spending, the new Medicare prescription drug benefit, the costs of the war in Iraq and the period of economic hard times following September 11, 2001..." all have created a massive debt that has no end in sight, Farrell continues.

Ferrell writes that though Bush is traveling the country presently, "campaigning for personal retirement accounts, their popularity - and Bush's approval ratings on the issue - have dropped," according to a poll by the Pew Research Center for People and the Press. The poll shows that while 58% of Americans were in favor of private accounts last September, only 46% favor the idea now.

Business Week reporter Paul Craig Roberts (Roberts, 2005) - who by his own admission has "long beat the drums for Social Security privatization" - has changed his mind, and is opposed to the Bush plan for Social Security reform.

First of all, Roberts writes that when he initially supported the idea of taking Social Security into private bank accounts - instead of the way it has been since Franklin Delano Roosevelt pushed the initial legislation through the Congress and signed it on August 14, 1935, with government checks mailed to individuals - it was a Ronald Reagan-launched scheme in the early 1980s. Had Reagan's plan gone through at that time, it would have been fortuitous: the 1980s and 1990s were "periods of strong employment growth," Roberts explains, and there was a "20-year financial market boom" which "would have helped generate the payroll revenues needed to fund the transition."

However, Roberts continues, now is not the time, mainly because of the "massive trade deficits and the costly war in Iraq that "undermine" the federal government's capacity to issue "trillions of dollars in new debt."

Roberts' strike one against the Bush plan: the weakening dollar cannot carry the debt burden that is required in order to finance the transition from public to private social security checks. "Foreigners are drowning in dollars," Roberts points out, and because the U.S. economy in relative decline," foreigners have "no appetite for additional trillions of dollars." The dollar, Roberts believes, is so weak now that it is in danger of "losing its status as a reserve currency."

Roberts' strike two against the Bush plan: There is a serious lack of "domestic savings" to fund the shift from public to private; the U.S. personal savings rate is "practically non-existent: and the federal budget is "awash in red ink." Meantime, "high-value-added, high-productivity jobs" have vanished, and those jobs have been replaced by "outsourcing, and the proliferation of H-1b and L-1 work visas for talented foreign professions coming into America, Roberts explains.

In fact, during the last four years of the Bush Administration, America experienced a "net loss of 760,000 private-sector jobs instead of a normal gain of millions" of new jobs. The only new jobs being created in substantial numbers, according to the Bureau of Labor Statistics (BLS), are "lower-paid, domestic services" jobs that "cannot be moved abroad." What is troubling when looking at the economic future of America - including the amount of payroll taxes collected by FICA taxes on checks - is the BLS's prediction that the "vast majority of new American jobs in the next 10 years will not require a university education."

Roberts' strike three against the Bush plan: "The drive for new revenues will likely result in raising the 'cap' on withheld wages and salaries above the current level of $90,000" he suggests. What that means is a "tax rate increase of 12.4 percentage on all income up to the new cap."

Explaining the "strike three" in simpler detail, Roberts points out that if the government "raises the cap" to keep Social Security afloat, and an employee is earning $500,000 a year, that employees would be taxed an additional $50,840 annually.

The Bush campaign to promote private Social Security accounts:

The president is flying around the country in recent days touting his plan to privatize Social Security, and his "stump speech" is very much similar to what he said in his weekly Saturday radio address: "Postponing reform will leave our children with drastic and unpleasant choices: huge tax… [END OF PREVIEW]

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