Obama faces larger problems than Social Security shortfalls

Despite troubled economy, its trust fund should still be able to meet pension payments for another 30 years.

Toward the end of his address to Congress last Tuesday, President Obama spoke of beginning a conversation on how to reform the Social Security program.

Such a suggestion makes Henry Aaron, a veteran analyst at the centrist Brookings Institution in Washington a bit edgy. Sure, he says, it's desirable to pay attention to Social Security, but "in the right way. It's better to do nothing than the wrong thing."

Obama spoke of Social Security right after calling for "comprehensive healthcare reform." Medicare and Medicaid are in far worse financial shape than Social Security. The nation's primary pension system could continue providing full benefits for decades to retirees and the handicapped without running short of money.

Economist Aaron worries that some Democrats will not be tough enough in bargaining with conservatives over Social Security changes if a bill comes before Congress. If that were to happen, the final bill could end up with unnecessary benefit reductions, he says.

The president himself, it's reported, originally considered forming a bipartisan task force to propose Social Security reforms to avoid a political dead end. But that idea ran into opposition from some Democrats and was dropped.

President George W. Bush proposed in 2005 partial privatization for younger Americans through personal savings accounts carved out of the fixed system. That proposal got nowhere in Congress.

Somewhat mysteriously, Obama mentioned creating "tax-free universal savings accounts for all Americans" in his address to Congress.

Given the economic crisis, a major alteration of Social Security involving extra risk would be an even harder sell today to Americans.

"All the arguments for Social Security have been strengthened rather than weakened," says Aaron.

For years the Social Security system has been running a surplus. Payroll-tax revenues have exceeded outgo for pensions and other payments, thereby building up reserves needed to deal with the numerous baby boomers just starting to retire.

The Congressional Budget Office projects the surplus for fiscal 2009 will be 40 percent less than assumed in the fiscal 2008 budget projections. A drop-off in tax revenues from millions of Americans who have lost jobs is among the reasons for this development. On top of that, some newly unemployed seniors may decide to collect their Social Security pensions right away, figuring they won't be able to get another job.

On the other hand, many older Americans have also seen their retirement funds badly damaged by the plummeting stock market. Some are deciding to work longer. As a result, they are continuing to pay into Social Security and not taking a pension.

How this balance of negative and positive aspects shapes up for the long-term health of the Social Security system is unclear. Andrew Biggs, an expert at the American Enterprise Institute in Washington, guesses the opposing trends will "roughly offset" themselves.

By law, the Social Security Administration makes annual 75-year actuarial projections of the soundness of the system. Last March, under Bush, the Social Security Trustees reported the Social Security Trust Fund would be depleted in 2041. At that point, Social Security benefits would be paid from payroll-tax revenues. These would not cover fully the sums promised, perhaps about 75 percent.

Obama has yet to appoint all six trustees – three Cabinet secretaries, the Social Security Commissioner, and two private appointees – to the trust fund. So this year's report for 2008 could be delayed. Whereas the Bush trustees sounded gloomy for Social Security, the Obama-appointed trustees might voice more hope.

Nonetheless, Aaron suspects they may choose 2040 or even 2039 as the date for depletion of the trust fund, in order "not to lose credibility."

To Aaron, describing Social Security as in "a crisis" is "simply Orwellian … a misuse of language." He says some of those seeking privatization consciously used a "Leninist [political] strategy" of alleging falsely that the existing system was unaffordable and younger Americans would not receive Social Security benefits, while adding correctly that older workers would go untouched. Any financial shortages down the road could be fixed by relatively minor tweaks of the system, Aaron argues.

A new book by Jacob Kirkegaard of the Peterson Institute of International Economics and Martin Baily, now at Brookings, compares the American pension system with that of other industrial nations with an aging population.

"The design of Social Security is fundamentally sound," says Mr. Kirkegaard. "Compared with other countries, it works very well." He warns against fixing something that "is not broken."

He finds US Social Security benefits "not very generous" compared with government pension systems of many other nations, especially in Europe.

Benefits could be made considerably more generous with a relatively small increase in the payroll tax, reckons Bernard Wasow, an economist at the Century Foundation. "I don't know if popular opinion would cotton to that," he says.

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