NEW YORK (CNN/Money) – Social Security reform will be a focal point of President Bush's State of the Union address Wednesday.
White House press secretary Scott McClellan told reporters Tuesday that the president would talk "in greater detail than he has previously about how we need to work together to ... permanently fix Social Security."
Nevertheless, some Washington observers aren't expecting much detail beyond the broad guidelines the president has already oulined. Ditto for his presentation of his budget next Monday.
"There's not going to be any details," said Chris Edwards, the director of tax policy studies at the libertarian Cato Institute. "They don't want the budget accounting to get in the way of the message ... of the benefits (of overhauling Social Security)."
By offering few specifics, Edwards added, Bush won't give Democrats an opportunity to pounce on the potential costs.
The president's goal Wednesday, he noted, will be to convince Americans that Social Security is in serious trouble and needs to be addressed immediately – something critics staunchly contest. He also wants to sell the public on the benefits of adding individual investment accounts.
To date, the president has offered "guiding principles" for reform:
Mind the details
- It should include the addition of voluntary individual investment accounts.
- Those accounts would be funded using a portion of the payroll tax workers currently pay into the system.
- Investments would be limited to a handful of conservative to moderate diversified funds, akin to the five index-like funds offered in the Thrift Savings Plan for government employees. There have been reports Bush might support an automatic default into a lifecycle fund – which grows more conservative as investors near retirement – unless a worker selects otherwise.
- Payroll taxes must not increase; and
- There should be no benefit changes for current and near retirees.
The details of those guidelines are what will determine their political viability.
Here are some key questions to be answered:
How much payroll tax would be diverted? In the most talked-about reform proposal -- Model 2 of the President's Commission to Strengthen Social Security -- workers may divert up to a third of the 12.4 percent of worker's wages currently paid into the system. But contributions would be capped at $1,000 a year.
Since payroll taxes pay the benefits of current retirees, diverting a portion of taxes is estimated to create a shortfall of between $1 trillion and $2 trillion in the near term.
How would we pay for those transition costs? In December, White House spokesman Scott McClellan indicated that the government would borrow the money. But the president hasn't stressed this element.
And fiscal conservatives on both sides of the aisle have expressed concerns about adding to the country's deficit.
Would the cap on wages subject to payroll tax go up? Currently, the first $90,000 of wages is subject to the flat payroll tax. If that cap is raised or eliminated, that would be an effective tax increase for high-income workers.
Will reform reduce benefits? Even the White House acknowledges that individual investment accounts do little or nothing to resolve the system's anticipated $3.7 trillion shortfall over the next 75 years.
To shore up the system, taxes would need to be raised, benefits cut, spending on other programs curtailed or more money borrowed.
Those who contend there is no "crisis" argue that small changes in a few areas would make the system solvent. (To see what many of those options are, play the Social Security game from the American Academy of Actuaries.)
The president is said to be considering a change in the way starting benefits are formulated. The proposed change would result in a benefit reduction for future retirees relative to what the current system could afford to pay, according to estimates from the bipartisan Congressional Budget Office.
What defines "near retiree?" The answer is of particular concern to those in their 50s. In talks with AARP members in their early 50s, "there's an unease" about whether their benefits will be cut or how they will fit into a voluntary account plan, said Ridge Multop, AARP's senior legislative representative.
What would be the administrative fees? Opponents of privatization allege that individual accounts would provide a windfall for Wall Street.
It's unclear. If the accounts are modeled on the Thrift Savings Plan, the government is likely to assume most of the administrative costs. The CBO estimates fees would reduce returns by 0.3 percent.
But if a second tier of funds is made available to workers once they've accrued a certain balance – a feature of Model 2 -- the fees may be higher. That's because the second tier would let workers invest in approved private-sector funds. Loads would be waived, but if the funds are actively managed (as opposed to index funds in Tier 1), the expenses may be higher.
How quickly will changes phase in? The cost of any changes and their affect on different age groups will depend on when the change takes effect.
What's the payout policy? The appeal of an individual account is determined in part by rules governing access to the money. For example, would workers have to buy an annuity at retirement up to a certain account balance? And if so, how would that affect their ability to bequeath money to heirs if their balance isn't that high or if they die soon after retirement?
For other relevant questions, check the report Unchartered Waters by the National Academy of Social Insurance.