Some Find Strong Pulse in Social Security

WASHINGTON —  Even before settling on a proposal to privatize part of Social Security, President Bush is mounting an aggressive campaign to convince the public of something that many Democrats and economists say is mistaken: that the massive government retirement system is hurtling toward disaster.

Three times in the past week, Bush has created or used public relations events to promote his view that Social Security is facing a dire financial threat and needs major repairs. Most recently, Bush said in his Saturday radio address that “the system is headed towards bankruptcy down the road. If we do not act soon, Social Security will not be there for our children and grandchildren.”

The issue will also be central to a White House conference scheduled for Wednesday and Thursday meant to draw attention to Bush’s economic agenda for the next four years.

The public relations campaign shows that even before Congress and the public debate various plans to overhaul the hugely popular program, a major battle over Social Security is underway.

Bush, as one of the legacies of his presidency, wants workers to be able to shift some of their Social Security taxes into privately owned accounts, which they would invest in the stock or bond markets. In this vision, the government could pare back the benefits promised under Social Security, shoring up the finances of the program, because the return on the investments in the private accounts would help workers support a comfortable retirement.

But Bush’s critics say that he is overstating the financial problems so that the public will more readily accept the “radical” cure of private accounts.

Some critics worry that they are running second in the public relations race. Dean Baker, co-director of the Center for Economic and Policy Research, warns of “an incredible misunderstanding of the basic problem. The public thinks the program will disappear in 10 to 20 years.”

Critics of private accounts point out that the board that oversees Social Security estimates that the program will not run out of funds until 2042 -- and even then, ongoing payroll taxes will be able to foot the bill for about 75% of full benefits.

That leaves plenty of time, they say, to assure Social Security’s future with just a little nipping and tucking -- slightly higher taxes, minimally smaller benefit increases, maybe a higher retirement age.

“Social Security is not in crisis, and the financial challenges facing the system are manageable,” said Rep. Robert T. Matsui of Sacramento, the senior Democrat on the House Social Security subcommittee.

Matsui and other opponents of private accounts argue that every dollar contributed to the investment accounts would no longer be available to pay the standard benefits of workers who are now retired or soon will be. The shortfall could run into the trillions of dollars, which the government would have to borrow, adding to the deficit.

Polls show that starting workers are much more likely than older ones to think that Social Security will not survive long enough to provide them with any retirement income. “My generation has been told by politicians every election cycle that Social Security is going bankrupt, and we believe it,” said Ben Ferguson, 23, host of a conservative radio talk show syndicated by Radio America.

If there is not going to be any Social Security for members of his generation, Ferguson said, they may as well gamble with investment accounts that they control. “We can’t do any worse than Social Security will,” he said.

By contrast, Debra Sher, a 51-year-old executive who lives in Virginia, is counting on Social Security to provide a small but reliable base to her and her husband’s retirement income. “The collapse of Social Security has been talked about as long as I can remember,” she said, “and it hasn’t happened so far.”

Her husband is on the other side of the fault line. Jim Kidd, who runs a firm teaching marketing techniques, does not think Social Security as now constituted can survive the onslaught of baby boomers’ retirement.

“It will collapse like a house of cards under a heavy weight,” he warned. “If something’s not done to shore up the system soon, we’re all going to be retiring at age 70, at least if we want full Social Security benefits.”

Bush and his aides painted their own picture of Social Security’s financial health several times in the past week -- on Monday, as the president invited congressional leaders to the White House to discuss the program, and on Thursday, when he held a meeting with the trustees who oversee Social Security.

“By the time today’s workers in their mid-20s begin to retire, the system will be bankrupt, unless we act to save it,” Bush said in his Saturday radio address. “A crisis in Social Security can be averted, if we in government take our responsibilities seriously.”

Sher or Kidd, Bush or Democrats: Who is right about Social Security’s future? Whichever side can make the more convincing case will probably have a big advantage in the fight to determine the program’s fate.

Both sides are looking at the same set of information.

For now, Social Security is taking in more through the payroll tax than it is paying out in benefits. Lots more.

In 2003, income to the Social Security trust fund, including interest earned on the accumulated surplus, totaled $632 billion. Outlays, including administrative expenses, were $479 billion.

That left an annual surplus of $153 billion, or about four months worth of benefits.

At the end of the year, the trust fund had more than $1.5 trillion -- more than three years’ worth of benefits.

Baby boomers, who will start to become eligible for partial benefits in 2008 and full benefits in 2012, are about to turn this equation on its head. Today there are 3.3 workers for each retiree; by 2040, there will be 2.

Social Security’s board of trustees -- three federal officials and three knowledgeable private citizens -- estimate that benefits will overtake revenue in 2018. The program will be able to pay scheduled benefits only by drawing down its surplus.

In 2042, the trustees estimate, Social Security will become “insolvent.” The surplus will be exhausted, and annual payroll tax revenue will be the only source of cash. It will be enough to pay only about three-fourths of promised benefits.

Neither benefit levels nor taxes will be the same then as they are today. Benefits rise annually with price inflation; initial benefits are determined by wage history. Wages earned early in the recipient’s career are adjusted for subsequent inflation.

But this adjustment is calculated by using wage inflation, not price inflation. Wages have outpaced prices over the years, and wage growth between now and 2042 is projected to exceed price growth by more than 25%.

So, even if Congress did not touch Social Security’s benefit formula through 2042, a 25% benefit cut when the surplus ran out would still leave benefits slightly higher than they were now -- even after adjusting for price inflation.

That, according to opponents of private accounts, is not exactly a formula for disaster. On the revenue side of the ledger, the Social Security payroll tax rate -- 6.2%, matched by an equal tax on the employer -- has not changed since 1990. But the maximum wage on which the tax is levied, $87,900 in 2004, rises annually with wage inflation.

The estimates of Social Security’s financial health are extremely sensitive to assumptions about future economic growth, birth rates and other imponderables.

The Congressional Budget Office, which has made an independent prognosis, is slightly less pessimistic than the Social Security trustees. It fixes 2019 as the year when the program’s cash flow turns negative and 2052 as the year when the surplus dries up. Sen. Lindsey O. Graham (R-S.C.), the author of one of several proposals to substitute private investment accounts for a portion of Social Security, says the timeline shows the need for radical action. “Social Security is going bankrupt,” he said. “It’s coming apart at the seams. To do nothing is a death blow to Social Security.”

Many Democrats accuse Republicans of intentionally making Social Security’s future look bleaker than it is so that they can more easily sell their privatization proposals. The Republican agenda, they say, is more ideological than financial: the promotion of Bush’s “ownership society.”

Kim Wallace, chief political analyst for Lehman Brothers, the investment house, said the administration’s real purpose was to reduce Social Security payroll taxes. “This is more about restructuring tax policy and not calling it that,” he said.

To Wallace and most other opponents of private accounts, the sky is not about to fall. “Restoring long-term financial balance to Social Security is ... necessary, but it is not necessary to destroy the program in order to save it,” said Peter R. Orszag, an economist at the Brookings Institution. He likened Social Security to a car with a flat tire: You don’t need to throw away the car, but you need to fix the flat.

Orszag and Peter A. Diamond, an economist at MIT, have offered one of the few proposals to fix the flat. They would do a little of everything: reduce benefits from their promised levels, though not from their current levels; increase the tax rate; increase the amount of wages upon which the tax is levied. The benefit cuts in the proposal, Orszag said, were calibrated to be zero for the poor, moderate for the middle-income and greater for the wealthy. The last time Social Security was “rescued,” it was truly on the brink. The year was 1983, and the retirement trust fund was down to its last $20 billion, $18 billion of it borrowed from the Medicare and disability insurance trust funds.

A commission headed by Alan Greenspan, who went on to become chairman of the Federal Reserve, recommended -- and Congress approved -- large jumps in the wages subject to the Social Security tax, along with hikes in the tax rate itself and an income tax for the first time on some Social Security benefits of wealthier recipients.

Then, the crisis was imminent; now, it’s in the hazy future. Baker, an analyst who opposes private accounts, said that if Congress acted now, it could guarantee Social Security’s solvency for the next 75 years with a tax increase of less than one-quarter the size of the one enacted in the 1980s.

But those who favor private accounts say that now is a unique opportunity to make the program not only financially sound but also financially rewarding for individual recipients, many of whom have never had a chance to share in free-enterprise prosperity.

Said Grover Norquist, president of the conservative advocacy group Americans for Tax Reform: “Social Security should be reformed not because the system is going broke but because it’s a lousy program.”

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Times staff writer Warren Vieth contributed to this report.