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Social Security Investment Accounts, Indexing in Bush Budget

Reform ideas that never caught on in 2006 are back in the 2007 budget

Feb. 6, 2006 – There were so many things grabbing the public's and media's attention in the $2.77 trillion federal budget for FY 2007 presented yesterday, that many senior citizens may have missed that the President has put private investment accounts and the indexing of benefits (determining payments by need) for Social Security back on the table and in the budget.

(Note: See Social Security budget below news report.)

The creation of private investment accounts for younger workers was the major domestic proposal for the President in 2005, but the idea met hostile opposition by most senior citizen advocacy groups and a cool reception in Congress. The concern expressed by most seniors was that the investment accounts would put their retirement benefits at risk. The President tried to overcome these fears by assuring those already drawing Social Security that they would not see any changes.

The Social Security Administration, in an explanation of their budget posted online yesterday, said, "Social Security is sound for today’s seniors and for those nearing retirement, but it needs to be fixed for younger workers."

The statement said the President is committed to "strengthening the Social Security system" and has put forward three goals for any reforms:

   ● strengthen the safety net for future generations;
   ● protect those who depend on Social Security; and
   ● offer every American a chance to experience the opportunity of ownership through voluntary personal retirement accounts.

"Under the President’s approach, Social Security would include voluntary personal accounts funded by a portion of workers’ payroll taxes," according to Social Security.

Here is how they say the personal accounts will work:

"The accounts will be funded through the Social Security payroll tax. In the first year of the accounts, contributions will be capped at four percent of Social Security taxable earnings, up to a $1,100 limit in 2010, increasing by $100 each year through 2016."

So, a younger worker, rather than pay all of his Social Security payroll tax to the government's Social Security fund, could designate up to $1,100 be put in a private investment account.

The President, says Social Security, has also embraced the idea of indexing the future benefits of the highest wage workers to inflation while providing for a higher rate of benefit growth for lower-wage workers.

This measure, they say, would significantly contribute to the solvency of the system.

Here is how they say indexing will work:

"By adjusting the way benefits are calculated, progressive indexing would eliminate nearly 70 percent of annual cash shortfalls by the end of the Social Security Trustees’ long-range (75 year) valuation period, trending towards greater improvement thereafter.

"Because progressive indexing would index benefits for lower-wage workers to wage growth, which generally grows faster than inflation, benefits would grow faster than the poverty level. This will keep a greater portion of future seniors out of poverty than today.

There were no details on exactly how much senior would receive not a definitive description of "the highest wage workers," whose benefits would be indexed to inflation.

Referring to the current system's "empty promises," the statement said, "By adopting progressive indexing and allowing young workers to create voluntary personal retirement accounts within the Social Security system, the President’s recommendations would provide future seniors with real money.

"Indexing benefits partially to inflation rather than wages allows the Government to save significant sums in future decades, money that would be used to maintain faster benefit growth for low-income seniors."

The statement concluded saying, "Without Social Security reform, benefits for future seniors will have to be cut about 30 percent across-the-board."

In discussing the problems with the current system, Social Security says:

"Social Security is sound for today’s seniors and for those nearing retirement, but it needs to be fixed for younger workers. Social Security today operates on what is known as a “pay-as-you-go” basis, in which current worker payroll taxes are used immediately to pay for the benefits of current retirees and other beneficiaries.

"In 1950, there were about 16 workers for every retiree. Today, there are slightly more than three workers for every beneficiary. By the time today’s 20-year-olds retire, that number will drop to two workers for every beneficiary.

"Furthermore, people are living longer than when the system was created. As the baby boom generation begins retiring in 2008, there will be a dramatic rise in the number of retirees, putting added strain on the system.

"In 2017, the Social Security system will collect less in taxes than it pays in benefits and will shift into a permanent cash deficit that will grow every year. In 2041, Social Security will exhaust its Trust Fund assets. If Social Security’s problems are left unresolved, today’s young workers will see their benefits sharply and suddenly cut, their children’s payroll taxes raised, or both."

Social Security Budget Document in pdf – Click Here

Below is the Budget Proposal for Social Security

It shows actual 2005, 2006, 2007 budget and change 06 to 07

Social Security Administration
(In millions of dollars)

 1 The LAE account includes funding from the Hospital Insurance and Supplementary Medical Insurance trust funds for services that support the Medicare program, including implementation of Medicare Reform.

AGENCY-SPECIFIC GOALS

SSA sets goals to provide high-quality service, which is reflected in the Agency’s commitment to increase productivity, timeliness, and accuracy in processing applications for disability benefits. With this Budget, SSA expects to achieve the performance targets outlined in the accompanying table.

1 In 2005, an SSA worker on average made 260 disability decisions in that year. The higher number in a given year, the greater the productivity.

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