Speeches, Public Comments and Analyses

George W. Bush, President
State of the Union Message
February 2, 2005.

The State of the Union Message is not a place for detailed plans to be presented -- and President Bush certainly didn't present one. BUt there is one interesting conflict in what he did say.....

One of America's most important institutions -- a symbol of the trust between generations -- is also in need of wise and effective reform.

Social Security was a great moral success of the 20th century, and we must honor its great purposes in this new century.

The system, however, on its current path, is headed toward bankruptcy. And so we must join together to strengthen and save Social Security.

Today, more than 45 million Americans receive Social Security benefits, and millions more are nearing retirement. And for them, the system is sound and fiscally strong.

I have a message for every American who is 55 or older: Do not let anyone mislead you. For you, the Social Security system will not change in any way.

Since no plan will be enacted until sometime later this year, and implementing any changes will take time, this means the earliest the plan would actually be effective is in 2007. those aged 55 in 2007 will not reach normal retirement age (66) until 2018. Keep that date in mind as you read on.....

For younger workers, the Social Security system has serious problems that will grow worse with time.

Social Security was created decades ago, for a very different era. In those days, people did not live as long, benefits were much lower than they are today, and a half century ago, about 16 workers paid into the system for each person drawing benefits.

Our society has changed in ways the founders of Social Security could not have foreseen. In today's world, people are living longer and therefore drawing benefits longer. And those benefits are scheduled to rise dramatically over the next few decades.

And instead of 16 workers paying in for every beneficiary, right now it's only about three workers. And over the next few decades, that number will fall to just two workers per beneficiary.

With each passing year, fewer workers are paying ever- higher benefits to an ever-larger number of retirees.

So here is the result: Thirteen years from now, in 2018, Social Security will be paying out more than it takes in. And every year afterward will bring a new shortfall, bigger than the year before.

Note that any effect brought about in a change in benefits will, under the President's terms, affect only 1 year's worth of contributions for only those retiring in the year the President has labeled as the start of the problem (he no longer uses the word "crisis"), but..... (read on)

For example, in the year 2027, the government will somehow have to come up with an extra $200 billion to keep the system afloat. And by 2033, the annual shortfall would be more than $300 billion. By the year 2042, the entire system would be exhausted and bankrupt.

If steps are not taken to avert that outcome, the only solutions would be dramatically higher taxes, massive new borrowing or sudden and severe cuts in Social Security benefits or other government programs.

I recognize that 2018 and 2042 may seem a long way off. But those dates aren't so distant, as any parent will tell you. If you have a 5-year-old, you're already concerned about how you'll pay for college tuition 13 years down the road.

If you've got children in their 20s, as some of us do, the idea of Social Security collapsing before they retire does not seem like a small matter. And it should not be a small matter to the United States Congress.

You and I share a responsibility. We must pass reforms that solve the financial problems of Social Security once and for all.

Fixing Social Security permanently will require an open, candid review of the options. Some have suggested limiting benefits for wealthy retirees. Former Congressman Tim Penny has raised the possibility of indexing benefits to prices rather than wages. During the 1990s, my predecessor, President Clinton, spoke of increasing the retirement age. Former Senator John Breaux suggested discouraging early collection of Social Security benefits. The late Senator Daniel Patrick Moynihan recommended changing the way benefits are calculated.

All these ideas are on the table.

I know that none of these reforms would be easy. But we have to move ahead with courage and honesty, because our children's retirement security is more important than partisan politics.

I will work with members of Congress to find the most effective combination of reforms. I will listen to anyone who has a good idea to offer.

We must, however, be guided by some basic principles: We must make Social Security permanently sound, not leave that task for another day. We must not jeopardize our economic strength by increasing payroll taxes. We must ensure that lower-income Americans get the help they need to have dignity and peace of mind in their retirement. We must guarantee that there is no change for those now retired or nearing retirement. And we must take care that any changes in the system are gradual, so younger workers have years to prepare and plan for their future.

Notice that the President has refused to incrtease payroll taxes. And there is the rub....

While he would divert money from the trust funds to start financing private accounts in 2007, there would be no impact of these accounts on benefits until 2018 (and even then only the smallest of impacts, reducing benefits by about .6% (six tenths of one percent) In other words, after 11 years or reductions of reductions in funds paied into Social Social security (he didn't give a schedule for how the transition would work, so we can't estimate the total amount diverted, but a reasonable. If 2017 *was* the problem date, any Presidential plan cannot do anything but make the problem occur earlier. In fact. the only way to delay the problem is by increasing taxes (or going even deeper in debt). But the president has refused to consider the first option and claims his "plan" is meant to correct, not compound, the latter.

The CBO/1/, evaluating Presidentiall Commission Plan 2 caclulated that the trust funds would have to begin drawing revenues immediately after the plan became effective. In other words, we won't have to wait until 2017, we can have the problem now.

As we fix Social Security, we also have the responsibility to make the system a better deal for younger workers. And the best way to reach that goal is through voluntary personal retirement accounts.

Here is how the idea works:

Right now, a set portion of the money you earn is taken out of your paycheck to pay for the Social Security benefits of today's retirees. If you're a younger worker, I believe you should be able to set aside part of that money in your own retirement account, so you can build a nest egg for your own future.

Here is why the personal accounts are a better deal:

Your money will grow, over time, at a greater rate than anything the current system can deliver.

This is not a function of privatization, this is a function of transferring from a pay-as-you-go system to one based on the amassing of assets now to fund future benefits.

And your account will provide money for retirement over and above the check you will receive from Social Security.

The question isn't whether you'll get one checks or two, but whether the two will pay greater benefits than one under some different plan. In fact, after accounting for risk, the CBO has noted that the two checks will actually provide less -- far less than the one you'd get if changes were made to continue funding the current system.

In addition, you'll be able to pass along the money that accumulates in your personal account, if you wish, to your children and -- or grandchildren.

And best of all, the money in the account is yours, and the government can never take it away.

Actually, it would not be significantly more difficult for "the government" (the President seems to not understand that he and the Republican Congress are "the government") than it would be under the current system. All the government need do is change the laws at a later date about how the money could used and/or change its tax status.

The goal here is greater security in retirement, so we will set careful guidelines for personal accounts:

We'll make sure the money can only go into a conservative mix of bonds and stock funds.

We'll make sure that your earnings are not eaten up by hidden Wall Street fees.

We'll make sure there are good options to protect your investments from sudden market swings on the eve of your retirement.

We'll make sure a personal account cannot be emptied out all at once, but rather paid out over time, as an addition to traditional Social Security benefits.

And we'll make sure this plan is fiscally responsible by starting personal retirement accounts gradually and raising the yearly limits on contributions over time, eventually permitting all workers to set aside 4 percentage points of their payroll taxes in their accounts.

Personal retirement accounts should be familiar to federal employees, because you already have something similar, called the Thrift Savings Plan, which lets workers deposit a portion of their paychecks into any of five different broadly based investment funds.

It's time to extend the same security and choice and ownership to young Americans.

Footnotes

1. Congressional Budget Office, Long-Term Analysis of Plan 2 of the President's Commission to Strengthen Social Security, Figure 1A, http://www.cbo.gov/showdoc.cfm?index=5666&sequence=0, viewed Feb 3, 2005