February 4, 2005

February 4, 2005 | WebMemo on Social Security

Would Social Security Reform Lead to a 40 Percent Cut in Benefits?

Opponents of Social Security reform say that catastrophic benefit cuts would occur only if individuals were allowed to invest a portion of their payroll taxes in personal retirement accounts, as the President has proposed. This willful misunderstanding of the operation of personal accounts is dishonest and obscures the truth: While inaction will lead to automatic cuts in Social Security benefits, personal accounts could allow Social Security to pay what it has promised.*

 

Cuts and Rumors of Cuts

"The President's proposal for privatized accounts makes Social Security weaker, not stronger," said Rep. Charlie Rangel (D-NY) last month. "It drains $2 trillion from the trust fund, leading to drastic cuts in benefits of more than 40 percent."[1]

 

This rhetoric is not atypical. For example, earlier this week, a political activist group, MoveOn.org, launched an advertising campaign warning of "up to a 46% cut in benefits" under the President's plan.[2] Another activist group, the Campaign for America's future, has been using the same figures as Moveon.org to describe the effects of the President's plan on a state-by-state basis.[3]

 

Nor do these claims come only from extremists. In his response to the State of the Union Address, Senate Minority Leader Harry Reid (D-NV) said that President Bush's reform proposal would lead to "a guaranteed benefit cut of 40 percent or more."[4] 

 

Opponents of Social Security reform obviously believe this to be a potent talking point, but is it true?

 

Right now, Social Security promises younger workers benefits that the system, on its present course, will be unable to pay. Making this point most convincingly are Social Security's own trustees, who in their 2004 report project that the program will be forced to cut benefits by 27 percent in 2042 when Social Security's Trust Fund runs out of Treasury bonds to redeem.[5]

 

Personal accounts, as part of a responsible plan for reform, change that equation. Because money in a personal account could grow more quickly than money 'saved' in the traditional system, benefits would be higher than is possible under the traditional system alone.

 

How, then, do opponents of reform arrive at their misleading predictions? By simply ignoring the money saved and invested in personal accounts. Their numbers imply that investing money in personal accounts would reduce the amount of money available to pay benefits by 13 percent, leading to an overall benefit cut of 40 percent. This analysis assumes that the money that goes into the PRAs would just disappear and that none of it would be available to pay Social Security benefits in the future. Nothing could be further from the truth.

 

Doing Nothing Is Far Riskier

Inaction, not reform, is the real threat to younger workers' Social Security benefits. Without reform, the system needs an infusion of $27 trillion in taxes through 2079. This will make Social Security an even worse deal for younger workers than it is for those near retirement today.

 

Without substantial changes of the sort outlined by the President, future benefit cuts are a near certainty. Reform that puts Social Security's future obligations into line with what the system can afford and allows younger workers to invest a portion of their payroll taxes in private accounts is a way to achieve better and more secure benefits than what is possible in the current system.

 

Opponents' insistence that creating personal accounts would somehow cause a cut in Social Security benefits is based on nothing more than a willful misunderstanding of how reform actually works. While perhaps effective political grandstanding, this attack does nothing to strengthen and preserve Social Security.

 

David C. John is Research Fellow in Social Security and Financial Institutions, and Keith Miller is Research Assistant, in the Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundation.



* Also see David C. John, "The Myth of 40 Percent Benefit Reductions Under Social Security Reform," Heritage Executive Memorandum No. 768, August 21, 2001.

[1]Charlie Rangel, "Text of Rep. Charles Rangel's Radio Address for Jan. 8," U.S. Newswire, January 8, 2005.

[2] MoveOn.org, "Help us air 'Working Retirement' ad on Social Security" at https://www.moveon.org/donatec4/socialsecurity.html.

[3] See, e.g., Campaign for America's Future, " PRIVATIZATION = $152,000 Cut in Social Security Checks for Typical Pennsylvanian," at /static/reportimages/0BE4103CFABBFCA74B13A97E9681AAD3.pdf.

[4] Harry Reid, "Senate Democratic Leader Harry Reid's response to State of the Union," February 2, 2005, at http://rawstory.com/news/2005/index.php?p=28.

[5] Social Security Administration, "Frequently Asked Questions About Social Security's Future" at http://www.ssa.gov/qa.htm.

About the Author

David C. John Senior Research Fellow in Retirement Security and Financial Institutions
Thomas A. Roe Institute for Economic Policy Studies

Related Issues: Social Security