South-Western College Publishing - Economics  
Bush Wants Private Accounts for Social Security
Subject Social Security
Topic Taxes Spending and Deficits
Key Words

Social Security, Taxes, and Private Accounts

News Story

President George W. Bush has had little success in his first term with gaining approval of private accounts for Social Security. Some from his own party have not come on board and Democrats seem ready for a fight. He has, however, raised the issue to the top of his political agenda for his second and final term in office. Mr. Bush would like to divert four percent of people's earnings into private accounts as a first step toward transforming Social Security over a longer period of time.

Mr. George W. Bush has attempted to draw bipartisan support by indicating that he does not rule out raising or eliminating the cap on earnings subject to the payroll tax that currently pays for Social Security benefits. Currently, the cap is at $90,000, so that any earnings over that amount are not taxed. The total tax of 12.4 percent is levied against all wages up to the cap and is split equally between employee and employer.

Bush cites one and only one area that he will not consider. "The one thing I'm not open-minded about is raising the payroll tax rate," the President said in an interview at the White House. "And all the other issues are on the table and that's important for people to know."

The President found support from Federal Reserve Chairman Alan Greenspan. "I think the existing structure is not working," Mr. Greenspan told members of the Senate Banking Committee. Greenspan said that the private accounts would be "a good thing to do," but urged lawmakers to "start out slowly" and understand that it might require huge amounts of additional borrowing by the government over a period of time. "If you're going to move to private accounts, which I approve of, I think you have to do it in a cautious, gradual way," he said.

Estimates provided by the White House suggest that Mr. Bush's plan for Social Security would require about $754 billion over the next decade. That figure, however, is based on the President's strategy of delaying the introduction of the new plan until 2009 and then phasing in the accounts over a number of years. This strategy is intended to hold down the costs of the program.

On the issue of the potential long-term borrowing, Greenspan said, "We don't know how the markets respond to that. And if we were to go forward in a large way and we were wrong, it would be creating more difficulties than I would imagine." So far, the White House has only outlined the plan for the individual accounts. Workers under the age of 55 will be allowed to divert up to 4 percent of those earnings now subject to the payroll tax into private accounts and invest the money in a limited portfolio of stock and bond funds.

In an interview, Mr. Bush said that an important issue was "how best to afford the transition from one system to another. It's a feasible place to start to enable us to introduce a novel concept into a Social Security system that needs to be reformed."

Questions
1.

The Social Security program is called a "pay-as-you-go" plan. What do you think that means? What problems can you foresee with such a system?

2. If you had to choose between raising the cap on the payroll tax and raising the tax itself, which would you choose, and why?
3. Use the Internet to research when Social Security retirement revenues will fall below the retirement benefits paid out.
Source Edmund Andrews, "Greenspan Backs Idea of Accounts for Retirement," New York Times Online, February 17, 2005.

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