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Originally published Sunday, January 9, 2005 at 12:00 AM

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Rhetoric vs. reality on Social Security

At an economic conference last month, President Bush declared that Social Security's fiscal crisis has arrived. How well the administration does in persuading the public to accept...

Knight Ridder Newspapers

At an economic conference last month, President Bush declared that Social Security's fiscal crisis has arrived.

How well the administration does in persuading the public to accept that description of the system's condition will shape the debate over changing the system.

Opponents of Bush's plans to create private, personal accounts say there is no crisis. So do many economists, liberal and conservative. They acknowledge that a problem exists, and they argue over its immediacy and severity.

Semantics aside, there is broad agreement regarding fundamental facts concerning Social Security's fiscal state, facts often obscured, intentionally or not, by partisan rhetoric. Among them:

The system is not about to run out of money. As long as payroll taxes are collected, the well never will run dry. Unless something is done, though, there will come a time when Social Security won't be able to pay all that has been promised.

Despite what you've heard, the baby-boom generation is not the only source of the system's difficulties. The projected shortfalls, once they arise, persist long after the boomers are dead. In later years, with extended life expectancies, things actually worsen.

Although the existing system often is said to be fully funded through at least 2042, it's not that simple. A lot of the resources to pay for promised benefits exist as special Treasury bonds, sitting in the Social Security Trust Fund. When the time comes to redeem those bonds, the money will have to come from the government's general funds.

No matter how Social Security is revamped — if it is — there's no avoiding the use of general revenue to pay for benefits at some point in the next 15 or 20 years. The only way to reduce (but not eliminate) the need to do so is to cut promised benefits, which the administration is considering. Payroll-tax increases wouldn't help much; the added revenue would only buy more bonds.

Personal accounts, funded by allowing individuals to maintain control of a portion of their payroll taxes, wouldn't help much, as even advocates acknowledge.

"The solutions we're talking about are for the more distant future," said David John of the conservative Heritage Foundation. "It takes at least 25 years for an account to reach a size where it could provide a significant amount of retirement income."

To understand the solvency issues facing Social Security, it's useful to divide the future into three periods and to look at what would happen in each if nothing were changed. The duration of these periods, as well as the financial projections, are taken from the report of the Social Security Trustees, published in March.

Stage One lasts until 2018. There is no real problem in that time span.

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As has been the case for years, the system is expected to continue to collect more in taxes — through payroll deductions and the tax imposed on benefits received by middle- and upper-income recipients — than the roughly $427 billion it pays in retirement benefits.

This year alone, incoming cash is projected to exceed outgoing by $91 billion. The money will be used to purchase bonds that help finance the federal debt.

Stage Two starts in 2018. At that point, as millions of baby boomers retire, the cash going out exceeds the cash coming in.

In the initial years after 2018, the funding gap would be filled by interest paid on the bonds, interest now being used to buy more bonds. The Old Age Survivors Insurance trust fund contains bonds worth nearly $1.6 trillion; the total is expected to exceed $4 trillion by 2018.

Later on, the bonds themselves will have to be paid off. This will put a growing strain on the federal budget. While that's undesirable, it's precisely the scenario envisioned by architects of the last major Social Security bailout, enacted by Congress in 1983.

"Yes, the rest of the government is going to have to come up with tax revenue to cover Social Security obligations during this period," said Bernard Wasow, senior fellow at the Century Foundation, a liberal think tank. "But the reason all these bonds exist is that for the last 20 years — and the next 14 — people have been paying and will continue to pay more in payroll taxes than is necessary to pay benefits."

The 1983 plan called for increasing the payroll tax to 12.4 percent, split between employer and employee, while gradually increasing the retirement age (67 for those born in 1960 or later) and the amount of income to which the payroll tax applies ($90,000 in 2005).

Stage Three begins when the bonds in the trust fund are gone, a circumstance expected in 2042, when the oldest baby boomers will be almost 100.

At that point, under current law, the only source of Social Security revenue would be the dedicated taxes on payroll and benefits. It's projected to be enough to pay for about 73 percent of benefits, those promised but not guaranteed.

And with retirees living longer and representing a larger share of the population, the picture would deteriorate gradually.

By 2078, benefits would fall to about 65 percent of what they otherwise would be under the current formula.

The trustees estimate the ultimate, "in perpetuity" shortfall at $10.4 trillion of today's dollars. Bush often cites the figure in seeking to convince Americans that a true crisis exists. The concept of an in-perpetuity number may sound ludicrous, but actuaries say it serves as a reminder that deficits keep piling up 100 years out.

In a report of its own, the Congressional Budget Office used more optimistic assumptions about economic growth than did the trustees. As a result, it projects that the bonds will last 10 years longer, until 2052, and that the system then will be able to pay 80 percent of benefits, not 73.

So does all of this amount to a crisis? In an ABC News/Washington Post poll last month, only 25 percent of those sampled accepted the description.

"The view that there's a crisis comes from the totally unwarranted impression that the entire system is going to collapse at some point and not be able to pay any benefits," said Robert Greenstein, an economist with the liberal Center on Budget and Policy Priorities in Washington. "That isn't going to happen. Which isn't to say there isn't a problem, or that's it's trivial."

Advocates of personal accounts say the effect of the system's difficulties will be felt in the not-so-distant future.

"Crisis or not, it's a big problem," said Kent Smetters, a professor at the Wharton School of the University of Pennsylvania. "The reason the administration wants to address it first is because the Medicare problem is much bigger."

There are the economics, and then there are the politics. To have any hope of transforming the most popular of government programs, Bush and his allies will have to convince the public that the system faces a real crisis, even if not an immediate one, and that his proposal is a real fix.

History teaches us that the American political system isn't good at addressing hard problems unless it has to. Domestically, problems don't get much harder than changing Social Security.

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