The White House is being stingy with specifics about far-reaching changes to Social Security that President Bush is seeking, reflecting an apparently tactical choice that more details would draw more attacks that could doom the proposal. But the president and his aides have said enough to allow outsiders to plug numbers into spreadsheets to illustrate how Bush-style Social Security might work.
The examples -- which the White House says are "premature" -- underscore how far Mr. Bush would move Social Security away from a system that offers monthly payments regardless of the financial market's ups and downs to one in which retiree benefits depend heavily on stock and bond market performance.
Under an approach similar to one Mr. Bush is advocating, retirement benefits wouldn't change at all for workers or retirees 55 and older, and wouldn't change very much for workers now in their 40s or early 50s. But for younger workers, particularly today's teenagers or those in their 20s who would spend their entire working lives under the new system, Social Security would be very different.
They would continue to pay 12.4% of their wages into Social Security, split evenly between employer and employee, but they could divert up to 4% into a private account. When upper-wage workers in this younger cohort retire in mid-century, 85% or more of their total Social Security benefits -- the traditional program plus what they draw from their private accounts -- would come from that private account.
Take a young man born in 1990 -- 15 years old today -- who earns a higher-than-average $58,400 a year, in today's dollars, from 2011 until he retires in 2055. Say he opts to put 4% of his wages into a Bush-style private account. He and his employer would put another 8.4% of wages into traditional Social Security.
At retirement, he'd draw both from his private account and from traditional Social Security. But that traditional benefit would be reduced twice from levels written into current law under a Bush-style proposal: once because he diverted some of his payroll taxes into a private account and a second time because Mr. Bush proposes to reduce promised benefits across-the-board to make Social Security solvent for the long haul.
If the law remained unchanged, such a worker is scheduled to get $28,863 a year in Social Security retirement benefits. But Mr. Bush and experts from across the political spectrum say the system as currently structured can't afford that. If he were paid only what today's tax rates would support, his benefit would be $21,126 a year. If benefits were reduced to make Social Security stable, using an approach that a Bush-appointed commission favored, he'd get $18,406 a year. All that's before any private account.
Under a Bush-style plan, if the worker opted for a private account, his traditional retirement benefit would be reduced sharply: He'd get just $2,191 a year from traditional Social Security. If his stock and bond mutual funds earned 3% a year after inflation, he'd have a $234,912 nest egg at age 65. If he turned that account into an annuity at retirement, he could get another $16,215 a year for life from his private account for a total annual benefit of $18,406. If stocks and bonds earned 4.6% a year after inflation, he'd get $28,396 a year; if they earned less, he'd do worse. But he'd get that same $2,191 traditional Social Security check no matter what the markets do.
The Wall Street Journal's examples rely on a spreadsheet built by Jason Furman, a New York University economist who opposes Mr. Bush's proposal. He worked on John Kerry's campaign and consults for the liberal Center on Budget and Policy Priorities think tank. His spreadsheet is built on publicly available Social Security data, estimates the impact of proposals the White House has described and allows the user to specify various assumptions.
The White House takes issue with this approach and with Mr. Furman's estimates. "Any numbers are premature," said White House spokesman Trent Duffy. "This whole exercise is looking only at a limited number of options that are available to the president and Congress. This whole exercise doesn't make sense because it's too early in the process."
Other senior administration officials, who spoke on condition that they wouldn't be named, challenged some of Mr. Furman's techniques for gauging the effect of Mr. Bush's proposals. "We can't verify [Mr.] Furman's numbers, and we have concerns about the accuracy of them," Mr. Duffy said.
The White House won't say when, or even if, Mr. Bush will make public a detailed plan. He could continue to offer suggestions to Congress and hope a compromise that he can accept will emerge. His only firm demands, so far, are to fix Social Security for a long time, avoid a payroll-tax increase and create private accounts. In New Hampshire yesterday, Mr. Bush left the door open to raising the maximum wages subject to the 12.4% payroll tax, now $90,000 a year. "Step one," the president said the other day in Raleigh, N.C., "is to convince people there's a problem. And once it gets in their mind that there is a problem, the follow-up question is, 'OK, now you see the problem, now what are you going to do about it?' And we haven't got quite to the 'what are you going do to about it?' stage yet." Any plan that Congress passes is almost certain to differ in detail, and perhaps in concept, from the one Mr. Bush is discussing.
Critics of Mr. Bush's approach fear high-wage workers might eventually rebel against paying taxes to support a traditional Social Security program that appears to them so little, eroding support for a program that guarantees a safety net for every worker in old age or in case of disability. "The president's proposal seems designed to trick higher wage earners into resenting the existing Social Security system. It creates an impression that they will get almost nothing out of Social Security," says Peter Orszag, a Brookings Institution economist who dislikes the Bush approach.
The president and his allies say the existing Social Security system will collapse without significant change, and argue that allowing younger workers to invest in mutual funds is more likely to leave them better off at retirement than alternative approaches to fix Social Security.
Mr. Bush emphasizes the size of the nest eggs that workers might accumulate, but not the related reduction in those workers' traditional Social Security checks. "A young person who earns an average of $35,000 a year over his or her career would have nearly a quarter million dollars saved in his or her own retirement account," he said in his Saturday radio address last week. "And that money would provide a nest egg to supplement that worker's traditional Social Security check, or to pass on to his or her children. Best of all, it would replace the empty promises of the current system with real assets of ownership."
The examples in this story are based on the following assumptions about Mr. Bush's plan:
The president would allow workers born after 1949 to divert up to 4% of wages into private accounts. He'd limit their contributions to $1,000 a year initially. "Yearly contribution limits would be raised over time, eventually permitting all workers to set aside 4 percentage points of their payroll taxes in their accounts," the White House says. It has specified how it would lift the contribution limit through 2015 -- but not beyond. These examples assume that the limit on contributions continues to rise so that by 2042 every worker can put 4 percentage points of his payroll tax into a private account.
The president says those who opt to divert payroll taxes into a private account would have to accept a reduction in traditional Social Security benefits at retirement. The spreadsheet incorporates the White House formula for doing so. Workers whose private accounts earn more than 3% after inflation on their private accounts would be better off than peers who don't opt for private accounts, under the Bush formula. Workers who earn less than 3% would be worse off.
The president says further reductions in benefits promised to future retirees (whether they opt for private accounts or not) are required to fix Social Security's finances, but he won't say what option he prefers. "In recent years, many people have offered suggestions, such as limiting benefits for wealthy retirees; indexing benefits to prices, instead of wages; increasing the retirement age; or changing the benefit formulas and creating disincentives for early collection of Social Security benefits," he said in Saturday's radio address. "All these ideas are on the table."
The examples detailed alongside this article show three scenarios for traditional Social Security benefits: (1) Social Security pays the benefits promised by current law, (2) Social Security pays the benefits that current tax rates would support, and (3) Social Security reduces initial retirement benefits by changing the formula used to calculate them beginning in 2012. This change was recommended by a commission Mr. Bush appointed and has been publicly praised by administration officials; the White House emphasizes that it hasn't endorsed it, though. If Mr. Bush sticks to his vow to avoid raising taxes, then benefit reductions of this magnitude are required to fix Social Security as he intends. Different approaches would affect low-wage and high-wage workers differently than this one.
The president says, "Personal retirement accounts could not be emptied out all at once, but rather would be paid out over time, as an addition to traditional Social Security benefits." These examples assume the worker turns his private account into an annuity that pays out over his lifetime.
The examples rely on an economic forecast made by Social Security actuary that has drawn fire from some for being too pessimistic about the likely pace of economic growth and from others for misgauging the likely life spans of the elderly in the 21st century. The projections of financial market returns are illustrative, not predictions.
Mr. Furman's examples are built on profiles of three typical workers prepared by the Social Security actuary from historic evidence -- a low-wage worker, a medium-wage worker and a high-wage worker -- and a fourth that illustrates a worker who earns at or above the maximum wage subject to the Social Security payroll tax, currently $90,000, for his career.
