Economy Thwarting Social Security Changes

N E W   Y O R K, Dec. 3, 2001 -- Remember the great Social Security debate?

A major issue in the 2000 presidential campaign and a prime piece of President George W. Bush's legislative agenda earlier this year, the matter of changing the nation's Social Security system has been left on the sidelines since the Sept. 11 terrorist attacks.

While Bush had pledged to initiate the first overhaul of the supposedly untouchable "third rail" of American politics in two decades, the country's campaign against terrorism has clearly put it on the back burner.

Indeed, the final meeting in Washington of Bush's hand-appointed Social Security commission last week generated far less political attention than it would have in more peaceful circumstances. The commission will release its formal recommendations later this month.

But with mid-term elections coming up in November 2002, Congress is unlikely to want to broach the subject.

"It would be quite a reach to believe that this would be on the table any time soon," says Ross Baker, a professor of political science at Rutgers University.

Commission Looks at Three Options

Of course, the underlying issue remains as crucial as ever: How to keep America's social safety net paying out its current level of benefits despite the strain of an aging population. Social Security's trustees say it will run a deficit by 2016 unless changes are made.

Social Security and the Pillars of Retirement

In response, the president's Commission to Strengthen Social Security outlined three types of major changes that could be made in hopes of helping the system pay for itself even when the country's numerous baby-boomers stop working and start drawing retirement.

One option includes Bush's pet proposal: to give people the chance to privately invest a small portion of their allotted funds, in the hope of earning greater returns than Social Security can give them. As a trade-off, those people would get a smaller guaranted payout when they retire.

The other options considered by the commission include raising benefits over time based on the rate of inflation, instead of wages; and reducing benefits while raising the retirement age and drawing in more than $10 billion a year from general government funds.

Planning Your Retirement: Personal Finance Calculators

Some of these ideas might be a tough political sell in any set of circumstances, let alone while the United States is waging a major military campaign.

But Bush's Social Security initiative has suffered from a loss of momentum for two additional reasons: the recession-bound economy and the erratic stock markets, both of which were faltering well before Sept. 11. The condition of each has changed dramatically since Bush started making an overhaul of Social Security a major campaign issue.

It’s the Economy …

In the first place, the slumping state of the economy has dealt a major blow to the White House's plans.

After years of strong growth, the country has officially entered into its first recession since the early 1990s. And after years of surpluses, White House budget director Mitch Daniels announced last week that the country might well face budget deficits for the rest of Bush's term in office.

By most estimates, at least $1 trillion would be needed to jump-start the creation of individual investing accounts. But the country's economic troubles are making the costs of the transition to a private system seem too great.

David Certner, Director of Economic Affairs for the American Assocation of Retired Persons (AARP), which opposes Bush's plan, says individual accounts "do nothing to address the future of Social Security — in fact, they make it worse" by forcing the government to pay more to get the private-account program going.

As the administration sees it, though, a struggling economy is all the more reason to take action.

"Now, I remind you that if nothing is done on Social Security and with the economy in a recession, Social Security goes broke faster," said White House spokesman Ari Fleischer on Thursday. "So it's not as if nothing can get done because we're in a recession."

Stock Plunge Makes Risks More Apparent

Then there is the ever-shifting stock market, which has staggered after years of record growth in the 1990s. In fact, the Dow Jones Industrial Average reached its peak, 11,722.98, in January 2000, as Bush was battling for the major Republican presidential nomination. On Friday, it closed at 9851.56, down 16 percent over nearly two years.

The ups and downs of the market, says Certner, "have reintroduced the American public to the concept of risk. They realized, the reason you got higher returns [in the stock market] is because of the risk."

How to Retire Happy

Nonetheless, Bush is holding to his basic belief that the market option will help the system.

"The president will continue to advocate this, and to build the base of support for whatever form and whatever time it can take place in, so that personal accounts can be created," said Fleischer on Thursday.

But some observers wonder if ongoing economic events will only make the idea a tougher sell for Bush.

"Something like Enron has an impact." says Baker, referring to the giant energy company which has collapsed spectacularly, with its stock price dropping from over $84 to under $1 in less than a year. "Even if it's a single big company, it's going to have a concussive effect on any plan to link the markets to Social Security."