Chuck Blahous hosts Ask the White House

Chuck Blahous
I am pleased to be with you to answer your questions about the President's proposals for strengthening Social Security and creating personal accounts. Currently, the President and other senior Administration officials are engaging in a conversation with the American public about the nature of the problems Social Security faces. I hope that you will find my answers to be helpful.

Tim, from Portsmouth, VA writes:
Without explaining how much it will cost if we worry about Social Security later and without referencing September 11th, please tell me how my family is going to pay for the transision costs. How are my wife, son, and I going to pay down this deficit?

Chuck Blahous
Tim, it is important first to understand that nothing that the President has proposed would add to the total costs that you, your wife, and son would face to pay for Social Security’s retirement benefits.

The term “transition cost” does not really refer to a new “cost.” It is simply the requirement that some Social Security money be saved in the near term, instead of all being spent by the federal government as under current practice.

As an analogy, let’s imagine that you and your family desire to have a certain amount of income in retirement. You can choose to wait until retirement and then try to come up with all of the money then, or you can choose to put aside a little money each year in saving now. Either way you still have to come up with money, but the far more prudent, sensible course is to do it now, gradually. That is by far the least expensive course, and is not an extra “cost” to you relative to the alternative approach.

The principle with personal accounts is the same. They require us to put aside some money now in saving. But the act of doing so doesn’t create new costs; it is just the most sensible approach to dealing with costs that are already there.

Bill, from Portland, OR writes:
President George W. Bush keeps bringing up the government employee's "Thrift Savings Plan" as the model he wants to use for his privatized accounts. - But isn't it true that Government employees have the equivalent of Social Security with the FERS and CSRS annuity?And isn't it true that the TSP is voluntary and is the government employees equivalent of a 401(k)?

Chuck Blahous
The personal accounts proposed by the President have many similarities to those now owned by federal employees. As in the federal employee retirement plan, the accounts would not be privatized. Recordkeeping and administration would be handled by a government entity. As with the federal employees’ plan, participants would select from a small number of simple, safe, broadly diversified funds. As with the federal employees’ plan, administrative costs would be very low. As with the federal employees’ plan, the decision to participate would be voluntary. And finally, the accounts would allow workers across America to have the same access to the fruits of long-term investing that federal employees now enjoy.

There would also be some differences. The President has proposed that workers be allowed to save some of their existing payroll taxes in personal accounts without paying more. By contrast, federal employees must make an additional out-of-pocket contribution to save in the Thrift Savings Plan. Also, under the President’s proposal for accounts in Social Security, workers would not be permitted to borrow from, or against, their personal accounts during their working years. This is because the personal accounts the President has proposed are there to fund only retirement benefits, not savings for other purposes.

Bob, from Scranton, Pennsylvania writes:
Chuck:The President says that SSA is going broke. Yet it is in black and white that the SSA Trust Fund is solvent and has enough cash available to continue payments from 2042 into the future. Is there a real need to disrupt the present SSA payment system at the current time,just to divert revenues to support private investment accounts ?

The Social Security system does not currently meet that Social Security Trustees’ test of sustainable solvency. Under current law, it will eventually not have sufficient assets to meet its obligations, and will thus be considered to be insolvent or bankrupt.

President Bush’s call to fix Social Security is essentially the same call that has been made in recent years by the Social Security Trustees, the General Accounting Office, the Congressional Budget Office, by President Clinton’s Advisory Council, and President Bush’s own bipartisan Social Security Commission, as well as a host of other non-partisan and bipartisan analysts. The only difference between his call and theirs is his ability, opportunity, and commitment to do something about it.

There is no real doubt that the current system is on an unsustainable course. In the last year’s Trustees’ report, an analysis was published that shows a 95% probability that the program will enter into permanent deficits some time between 2013 and 2023. Thus, there is no uncertainty about the need to act to fix Social Security for our children and grandchildren.

Personal accounts are an important part of the solution because they enable us to fix Social Security in a way that is fair to young workers. Without personal accounts on the table, the only options available would be those that further worsen the treatment of future workers and beneficiaries.

Anthony, from Cincinnati, Ohio writes:
I am 20 years old, and i would like to know; if the current system we have goes unchanged and does in fact go under by the time my generation is ready to retire, can I expect to recieve Social Security, or will the system be too exhausted to offer any retirement to my generation?

Chuck Blahous
Anthony, you are right to be concerned about the future of Social Security. It is sound for today’s seniors, but it is not currently sound for you. Left unchanged, it would indeed be insolvent by the time you retire.

The good news is, however, is that by acting today we can make it sound for you. The President is devoting his energy and his leadership to ensuring that this happens.

Jim, from Longview, Texas writes:
Why don't you tell more about the social security option that Galveston County Texas did many years ago and how that program has played out and the fact that federal employees already have private accounts?

The President does speak frequently about the fact that federal employees enjoy the benefits of personal accounts, and about his desire that other Americans enjoy the benefits of such a system. Those benefits include the opportunity for safe, long-term investing, very low administrative costs, and the opportunity to bequeath financial assets to one’s family.

You are also correct to note that many states and localities offer the benefits of personal accounts to their employees. Far from being a novel or untried idea, it is already working in many places around the country.

Wayne, from Portland OR writes:
I am a federal employee. I am covered in my retirement benefits by a combination of social security and FERS. I have found FERS to be a very flexible and attractive portion of my retirement plans. I can help the economy by investing in one of the stock funds, or hedge against a rainy day with the treasury secured G fund. Why can't we emulate this structure for the private sector? It seems that FERS is an already existing and viable example of the President's plan for Social Security.

Chuck Blahous
Thank you, Wayne. Yes, the President has drawn from the best elements of the federal employees’ retirement system in designing his proposed personal accounts for Social Security.

Wanda, from Kentucky writes:
What will happen to the elderly who do not invest wisely and end up with no money for their retirement years? What limitations will be placed on the stock market to ensure that another Enron won't happen?

Chuck Blahous
Wanda, under the President’s proposal, individuals who invest in stocks would only be permitted to invest in secure, broadly diversified funds. They would not be permitted to invest in single companies, whether it is the next Enron, or the best company imaginable. These accounts are not for day trading or stock picking, but rather so that workers can enjoy the benefits of sound long-term investing.

Tim, from Portsmouth, VA writes:
I see a lot of reports that say my future benifits will be cut an average of 24 percent. Is President Bush's plan to start private accounts come with any guaranteed rates of return, or is it a gamble?

Chuck Blahous
Tim, you may be referring to the fact that under the current system, starting in 2042, there will only be enough resources to pay 73% of promised benefits – in other words, 27% less than is scheduled.

We do know that under the current system, something has to give. We are looking at millions of additional retirees in the future, being promised benefits that are higher than today’s retirees receive, with only two future workers to support each person on Social Security. That is not a sustainable situation.

Clearly, some choices will need to be made to get the traditional system back on track. The President has indicated his willingness to consider every constructive idea – whether it comes from a Republican, a Democrat, or an Independent – that comes forward.

At the same time, however, the President believes it is important to give younger workers the option of personal accounts so that they have an opportunity for ownership and to seek better benefits than the current system can pay them.

No one will be exposed to any unwanted risk under the President’s plan. You can stay entirely in the current system if you want. If you want a personal account, you can choose to keep it invested entirely in no-risk government bonds. If you want to invest it in secure bond and stock funds to get a better return, you can do that, as well. Stock funds do not provide for guaranteed annual returns, but there has never been a historical period longer than twenty years in which our stock markets have failed to appreciate faster than inflation.

Ed, from Cal-north writes:
My father died 1 month before age 65. His union pension and social security died with him. My mother had to be supported and financially aided by her only child, me, for 15 years, until she died.Had there been something such as the separate account being proposed, this would have helped her a lot. Her problems caused me to get into the financial planning profession. I don't think you could find any financial planner or insurance agent that would oppose the presidents plan. Please share this with the president...........Thank you

Chuck Blahous
Thank you, Ed. As the President has traveled around the country talking about Social Security, it has been striking how many stories like yours that we have heard. The ability to pass on a personal account to one’s family is clearly one of the most important reasons to create the accounts.

Craig, from Houston, TX writes:
Chuck, I am very supportive of the President's proposal to reform social security by introducing private accounts. According to recent polls, the general public shows only tepid enthusiasm. However, I know that most people would support this idea if they more fully understood how it would benefit them. I'm also a little frustrated by congress's lack of urgency on this issue. I feel like they are out of touch on this issue and do not have the courage to embrace reform. What can I do as a private citizen to help?

Chuck Blahous
Craig, thank you. Certainly, let your legislators know of your support for action to fix Social Security for our children and grandchildren. Talk to the people you know, and write about the issues as they are debated in America’s newspapers and other periodicals.

Americans understand that there is a problem facing Social Security; the next step is demanding that the federal government solve it. That’s where your voice needs to be heard.

Gary, from Washington, DC writes:
On a previous "Ask the White House" session you said the social security system is headed for a 10.4 trillion dollar shortfall. Didn't the Social Security Trustees present this number as the system's deficit over the "infinite horizon," thus the number is not a useful in understanding social security's future solvency.

Certainly there is no single, perfect number for describing Social Security’s financial challenge. The best way to think of the problem may be visually: if you can imagine a rising line depicting the program’s projected future spending, and a far lower line depicting the program’s future revenues, you can see the problem in your head. The spending line is going to grow much faster than the revenue line. Our challenge is to bring those lines together, and to keep them together, permanently. That may be a better way of thinking of the challenge than any single number.

The reason that the $10.4 trillion number is useful is that it is the Trustees’ best available estimate of the system’s total shortfall going forward. The problem with many other measures is that they can distort the data by sometimes counting one element of the program while leaving out something else. For example, looking at the program over the next 75 years would mean counting the taxes paid by today’s newborns, but not most of the benefits that they earn. But whenever people contribute taxes, they earn benefits. In order to see the entirety of the shortfall, you have to look at both sides of the equation. The only way to do this is by counting the whole thing.

This is particularly important when comparing proposals to fix Social Security, with the current system’s shortfalls. One can be misled if one accidentally only looks at part of the picture, rather than the overall imbalance of the system going forward.

Dale, from Massachusetts writes:
Why do we need personal accounts when we currently are free to have IRAs if we want to invest some retirement funds? Doesn't current social security provide a level of protection and security beyond our current personal accounts?

Chuck Blahous
Dale, for many American workers, the 12.4% payroll tax is the highest tax that they pay. After paying their payroll taxes, they do not have enough money to cover their immediate needs and still have extra money to put aside in savings. Worse yet, if they die before retirement, their families will lose all of the money that they paid into Social Security, with nothing to inherit.

Because these families depend especially on Social Security, they are in extra jeopardy as a result of the current system’s projected shortfalls. By allowing them to put some of their payroll taxes in a personal account, we can accomplish a number of things, including:

Marvin, from Charleston, WV writes:
Are the investments manditory, or will people use the money for daily needs like food and utilities. Taking a tax deduction like an IRA deduction is not enough incentive. Has this been adderessed?The administrators of 401K plans are providing a lot of investment information on what mutal funds to inest in and why. What protection will the working person have?

Chuck Blahous
Thank you, Marvin. Participation in the personal accounts would be purely voluntary.

Those who choose the personal account, however, would not be allowed to spend from the account prior to retirement.

Protection will be provided to workers in a number of ways. A “life cycle” fund would be offered that would reduce an account holder’s exposure to market swings as he or she approaches retirement. In retirement, individuals would not be able to pull out all of their savings at once, if doing so would put them into poverty.

Steven, from Davenport NY writes:
I am 53 and plan to retire in 6 years. I am also planning to collect my social security at age 62. Will my present soc. sec. situation be reduced? If I choose to take part in placing part of my soc. sec. in private funds will there be ample time for the return to equal the reduction I would experiance? I do hope that the responses will be posted on this site. Thank You

Because of your age, you would only be affected, at most, very slightly by any reforms enacted. The President has said that nothing will change for those born before 1950 – those a few years older than you.

It is worth repeating, because seniors need to know that they needn’t be concerned. There will be no changes in the benefits of those born prior to 1950.

Accordingly, any changes that are made to fix the Social Security system would only have a very small effect on you, because they would only have begun to take effect for a couple of years by the time you retire.

Similarly, if you opt for a personal account, your account will not have as much time to appreciate as would be the case if you were younger. Thus, its impact on your total benefits would be small, compared to the account of a younger worker.

Although we cannot know the precise nature of a comprehensive plan to fix Social Security until one is agreed upon by the Congress and the President, any effects on you would be extremely small. The significant changes, of course, will be experienced by younger workers, who have the greatest stake in this debate.

Philip, from Rchester, MI writes:
Aside from the revisions that need to be done to strengthen Social Security, why don't we as a first step actually put the excess deposits this year and in the next coming years in a lock box, or seperate account, instead of just spending it on other things as in the past. We would be that much more ahead however little it might be.It's money being deducted for SS and should go there.

Chuck Blahous
One of the most important reasons to establish personal accounts is that they are the only sure way to make sure that surplus Social Security money is actually saved.

The current system does not allow for this, because it requires that any excess Social Security money be invested in U.S. Treasury bonds, which in turn finance the operations of the federal government. In other words, the current system facilitates the money being spent.

You have probably heard the term “transition cost” applied to the Social Security debate. A “transition cost” isn’t really a cost, but is simply the requirement that the government begin to save Social Security money for the retirees of tomorrow rather than continue to spend it today. Because the government would no longer be able to spend that money, some say that the government would face a “cost,” but this is misleading: by ensuring that the money is saved, we make a head start on funding the future obligations of the Social Security system.

Our current national debate is very much about whether workers can require that the government set aside a portion of their Social Security taxes and save them in personal accounts, or whether it will continue to simply spend all Social Security money. The President believes it is important that we begin to actually save surplus Social Security money, and thereby build nest eggs for individual workers that can help to meet their needs of tomorrow.

urray, from rupert writes:
Why is it not adequate to eliminate the earnings ceiling in combination with raising the contribution rate so that it becomes a pay-as-you go system? It seems these two changes would significantly extend the effective horizon of the Social Security system.

Chuck Blahous
To answer this, we need to remember why we have a Social Security problem. It is because the number of elderly in America is going to increase dramatically as we continue to live longer and longer.

In 1950, there were 16 people paying into Social Security for each one withdrawing benefits. Today, there are slightly more than three workers to support each person on Social Security. By the time today’s young workers retire, there will be only two workers to support each person on Social Security.

This means that the cost of the system, the burden on each worker, will continue to rise unless we change the way the system works. Raising taxes is only a stopgap solution as long as the system’s costs rise faster than the underlying tax base. For example, the current 12.4% tax that we pay would have to be more than 18% for our grandchildren, and would have to keep rising after that. We cannot continue down that path and still keep our economy strong.

Jim, from Sarasota, Florida writes:
Many Americans do not have high paying jobs or have any kind of pension plan except for Social Security. What happens to them if they contribute to a private social security account and the stock market takes a dive when they have reached retirement age and cannot work anymore? Will they be tossed out onto the streets or will the government set up a special welfare program for them?

Chuck Blahous
Thanks, Jim. First of all, the President’s proposed accounts are voluntary. Americans who do not want to have an account, and who simply want the benefits that the traditional system will be able to pay, could stick with that.

Also, even if individuals have accounts, they need not invest in the stock market at all. This decision, too, would be purely voluntary.

The President’s proposal would make available a “life cycle” fund that would automatically reduce the share of one’s investment in the stock market as one nears retirement. This would protect workers from sudden market swings on the verge of retirement.

Finally, it’s important to remember that even if the market does go down just before a person retires, this means that at some point earlier in that worker’s career, the market went up. There is no historical precedent for the stock market failing to provide real investment gains over the whole of a 40-year working career.

Gino, from Las Vegas, NV writes:
I've been investing in the stock market since I was 10 years old, now 21. Where would we be able to invest our money into and would it be just a few selected stocks and funds...like Blue chips?

Chuck Blahous
Gino, I’m impressed! Actually, under the President’s proposal for personal accounts, one wouldn’t need to be as experienced as you are. The available investment options would be small in number, and very simple. There would be basic corporate bond funds, government bond funds, and broadly diversified stock funds. Participants wouldn’t be selecting individual stocks or sectors of the market. The President’s accounts are designed so that all eligible workers can have safe, simple opportunities to receive the benefits of long-term investing, without requiring any special knowledge of financial markets.

Bill, from Portland, OR writes:
Republicans state that in 2018, the government will begin to pay out more in Social Security benefits than it collects in payroll taxes -- and shortfalls then grow larger with each passing year.But isn't it true that the drawing down of the Trust Fund as the baby boomers retire is exactly what the Trust was designed for in the first place. So why are the Republicans saying this will be a problem?

Chuck Blahous
This is an excellent question, because it cuts to the heart of how Social Security is financed under current law.

First, this is not something acknowledged by one political party only. Social Security revenues, beginning in 2018, will be short of the money required to pay full benefits. This reality has been presented by such non-partisan sources as the Social Security Trustees and the General Accounting Office. It is discussed by bipartisan groups like the Concord Coalition. The Clinton Administration budgets also described the same reality.

The shortfalls that begin in 2018 start small, but quickly grow large. By 2027, those annual shortfalls will exceed $200 billion a year (in today’s dollars.) By 2033, they exceed $300 billion every year. Worst of all, under current law, these shortfalls would be permanent and would grow without bound forever.

The Trust Fund consists of debt issued by the federal government. In order to find the money to pay this debt, the government must either raise taxes, borrow more money, or cut spending. Over time, the amount of money the government must find stretches into the trillions.

A good way to think of it is as follows: If the only thing that mattered were the existence of bonds in the Trust Fund, then all we would need to do to fix Social Security would be to print $10 trillion worth of bonds, place them in the Fund, and declare the problem solved forever. But clearly that doesn’t solve anything. Someone still has to come up with the money to pay off the bonds. That’s the problem. The Trust Fund represents the obligation to pay – but not the means.