Retiree fund in negative

But Social Security not on front burner

— Last year, as a debate over the runaway national debt gathered steam in Washington, Social Security passed a treacherous milestone. It went “cash negative.”

For most of its 75-year history, the program had paid its own way through a dedicated stream of payroll taxes, even generating huge surpluses for the past two decades. But in 2010, under the strain of a recession that caused tax revenue to plummet, the cost of benefits outstripped tax collections for the first time since the early 1980s.

Now, Social Security is sucking money out of the Treasury. This year, it will add a projected $46 billion to the nation’s budget problems, according to projections by system trustees.

Replacing cash lost to a one-year payroll-tax holiday will require another $105 billion. If the payrolltax break is expanded next year, as President Barack Obama has proposed, Social Security will need an extra $267 billion to pay promised benefits.

But while talk about fixing the nation’s finances has grown more urgent, fixing Social Security has largely vanished from the conversation.

Lawmakers in both parties are ducking the issue, wary of agitating older voters and their advocates in Washington, who have long targeted politicians who try to tamper with federal retirement benefits. Democrats lost control of the House last year in part because senior citizens abandoned them in protest over Medicare cuts in Obama’s much-contested health-care act, and no one in Washington has forgotten that lesson.

In his February budget request, Obama ignored the Social Security blueprint put forth by his own bipartisan panel on debt reduction.

During this summer’s debtlimit showdown, he endorsed the panel’s proposal to tie future benefits to a less-generous inflation index. But Obama took that idea off the table in September when he submitted recommendations to a special debt-reduction supercommittee now at work on Capitol Hill. Until recently, members of the supercommittee said, Social Security had rarely come up in their private deliberations.

Social Security is hardly the biggest drain on the budget. But unless Congress acts, its finances will continue to deteriorate as the rising tide of baby boomers begins claiming benefits. The $2.6 trillion Social Security trust fund will provide little relief. The government has borrowed every cent and now must raise taxes, cut spending or borrow more heavily from outside investors to keep benefit checks flowing.

Many Democrats have largely chosen to ignore the shortfall, insisting that the program is flush, citing the existence of the trust fund. They argue that fixing Social Security can wait, perhaps for years.

Senate Majority Leader Harry Reid, D-Nev., who is fighting to maintain control of the Senate, has been particularly outspoken. In March, as a bipartisan group of six senators was gaining attention for a push to draft a debt-reduction plan that included a Social Security fix, Reid summoned hundreds of activists to a rally on Capitol Hill. Fresh off a tough re-election campaign that turned in his favor after he accused his Tea Party opponent of wanting to “wipe out” Social Security, Reid exhorted policymakers to “leave Social Security alone.”

“Let’s worry about Social Security when it’s a problem. Today, it is not a problem,” Reid said to applause.

In an MSNBC interview, he added: “Social Security does not add a single penny, not a dime, a nickel, a dollar to the budget problems we have. Never has and, for the next 30 years, it won’t do that.”

Such statements have not been true since at least 2009, when the cost of monthly checks regularly began to exceed payroll-tax collections.

A spokesman said Reid stands by his comments and his view that Social Security is entirely self-financed. But Reid’s position has frustrated some Democrats who argue that fixing Social Security, the government’s single largest program, would go a long way toward restoring confidence among future retirees and the nation’s investors.

“It’s the one thing I’ve had the most difficult time grasping,” said Erskine Bowles, the former Clinton White House chief of staff and co-chairman of Obama’s fiscal panel with former GOP Sen. Alan Simpson.

The Bowles-Simpson plan would have righted the system’s finances with a combination of payroll-tax increases and reductions in scheduled benefits, mainly years down the road. It would have hit upper-income workers while raising benefits for the most needy, those with average lifetime earnings of less than $11,000 a year.

“By making these relatively small changes, you make it solvent and you make it be there for people who depend on it,” Bowles said. “I thought that’s what we as Democrats were supposed to be for.”

Just as the GOP has rejected any form of tax increase to contain the debt, however, Reid and House Minority Leader Nancy Pelosi, D-Calif., have ruled out any reduction in government retirement benefits.

Last week, Reid softened his stand, backing a Democratic proposal to the supercommittee that included the change in the Social Security inflation index. In return, however, Democrats demanded $1.3 trillion in new tax revenue, which Republicans instantly rejected, leaving the ideological divide as wide as ever.

Even that modest change to Social Security is drawing fire from a powerful network of organizations representing the elderly, unionized workers and traditional liberals. For years, these groups have cast any proposal to trim the growth in retirement benefits as unnecessary and as a meanspirited attack on the elderly.

In recent weeks, AARP, the nation’s largest and most influential organization for senior citizens, has been airing television ads in which an older man warns viewers that “some in Washington want to make a deal cutting the Social Security and Medicare benefits we worked for,” instead of cutting “waste and loopholes.”

AARP’s legislative director, David Certner, said the ads reflect the popular view that Social Security should not be dragged into a separate debate over the nation’s escalating debt.

“We paid into these programs all our lives,” he said. “This is our money. Congress has no business cutting into this program.”

Created during the Great Depression, Social Security grew in popularity as Congress repeatedly raised benefits through the 1950s and 1960s and then, in the 1970s, set initial benefits to rise automatically with wages and with inflation thereafter.

Those changes made the program vastly more expensive than the “old age and survivors” insurance originally envisioned by President Franklin Roosevelt. He wanted to protect workers and their families from financial hardship due to death, disability or aging. Retirement benefits were available at 65, at a time when life expectancy was significantly lower than today.

Congress later enacted an “early eligibility age” that permitted qualified workers to claim Social Security benefits at age 62.

The average age for claiming Social Security benefits plummeted from 68 in 1940 to 63 in 1980, where it remains. Meanwhile, average life expectancy has risen by five years. The average worker spends 20 years drawing benefits. A quarter will see their 90th birthdays.

As a result, the average retiree has gotten back far more in federal benefits than he paid into the system during his working life, according to research by Eugene Steuerle, a senior fellow at the Urban Institute. That return is diminishing, in part because people today have paid more into the system than previous generations. But a two-earner, middle-income couple retiring this year can expect to get $913,000 in Social Security and Medicare benefits over their lifetimes, in return for $717,000 in payroll taxes.

“I don’t think anybody envisioned a 30-year retirement,” said Marc Freedman, an author who has studied the cultural history of retirement. “That was never really the goal. And it certainly doesn’t make any sense today.”

Social Security supports about 55 million people. By 2035, that figure will swell to 91 million. Today, for every person claiming benefits, there are three workers paying into the system. By 2035, there will be two.

Congress foresaw this as early as 1983. Rampant inflation had driven the program’s costs through the roof. After decades of expansion, Congress finally had to scale back the program, choosing to tax wealthier retirees’ benefits and gradually raise the retirement age to 67.

Those changes, along with other adjustments, restored solvency and promised yearly surpluses that would build up the trust fund in preparation for the retirements of the baby boom. The surpluses were invested in special Treasury bonds, which, by law, must be repaid with interest.

Assuming they are, Social Security can pay full benefits through 2036. Once the trust fund is depleted, the system would rely solely on incoming taxes, and benefits would have to be cut by about 25 percent across the board.

Several factors have disrupted even that timetable. The recent recession caused the program to go cash negative years earlier than expected. The payroll tax holiday is depriving the system of revenue. And 10 years of escalating debt have crippled the government’s ability to repay the trust fund.

Certner of the AARP said it is unfair to consider cutting Social Security benefits to solve that problem.

“The federal government is saying, ‘We’re in the red right now and we’re having trouble paying back Social Security, so we’d like to cut Social Security benefits,’” Certner said. “But that’s not the deal.”

Sen. Richard Durbin, DIll., who has long allied with those who want to preserve the current benefit structure, surprised much of Washington last year when, as a member of the Bowles-Simpson commission, he backed cuts in benefits as well as tax increases to stabilize the program.

The panel’s report, and Durbin’s vote, drew howls from Social Security’s defenders. Obama declined to back it. And Senate leaders resisted an effort by Durbin and five other senators from both parties to bring the plan to a vote in the Senate, an effort that ultimately failed.

Durbin said he decided to back the Bowles-Simpson plan because he viewed it as “a chance to seize a bipartisan opportunity” to restore the program to solvency. He said friends assured him that regular people would accept ideas such as gradually raising the normal retirement age to 68 over 40 years: “To a person, they said, ‘Over 40 years? That’s not a problem.’”

“The reaction from some of the groups, and they’re my friends, I think was an overreaction,” Durbin said. “As I looked at this, I thought small changes made today will give 50 years or more solvency to Social Security. And that should be our goal.”

Front Section, Pages 1 on 10/31/2011

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