http://www.whitehouse.gov/news/releases/2005/01/print/20050113-5.html

Vice President Discusses Social Security Reform [January, 2005]
Caldwell Hall
the Catholic University of America

THE VICE PRESIDENT:  …

The time has come for an honest, straightforward, and realistic discussion about the future of the Social Security system. The system has been in steady service, uninterrupted, for nearly 70 years. It has fulfilled the promise announced by President Franklin Roosevelt -? providing vital income to millions of seniors, and assuring generations of working people that their retirement years would have some decent measure of security. For today's generation of senior citizens, the system is strong and fiscally sound. But younger workers are understandably concerned about whether Social Security will be around for them when they need it. The problem is simple to state: With an aging population, and a steadily falling ratio of workers to retirees, the system is on a course to eventual bankruptcy.

Social Security was designed in 1935 for a different world than the one we live in today. It is a "pay-as-you-go" system, in which the benefits that go to current retirees come directly from the payroll taxes of current workers. It is also worth noting that in 1935, the average life expectancy in America was about 60 years -? meaning that many people would not live long enough to become eligible for retirement benefits. So when the program was still new, in the 1940s, there were 41 workers paying into the system for every retiree drawing benefits. Over time, as more and more retirees entered the system and stayed in the system for a longer period, the number of workers per beneficiary continued to decline. By the 1950s, about 16 workers paid in for every person drawing out. Today, it's about three workers for each beneficiary. And by the time our youngest workers -- those just entering the work force today -- turn 65, the ratio will be down to two workers for each beneficiary.

At present, Social Security operates with a substantial cash surplus. But very soon, the greatest test of the Social Security system will be upon us. The first members of the baby boom generation are reaching age of 60, and they look forward to long, active, and healthy lives. In just a few years, their generation will begin retiring and collecting benefits, and the surpluses will begin to decline. By 2018, Social Security will begin paying out more than it receives in payroll taxes. From then on, the shortfalls will grow larger every year, until 2042, when the Social Security trustees estimate the system will reach fiscal collapse. By that point, with a projected shortfall in the trillions of dollars, the government would have no option other than to suddenly and dramatically reduce benefit payments by over 25 percent, or to impose a massive, economically ruinous tax increase on all American workers.

Now, the year 2018 may seem like a long way off, and in politics there is always a temptation to kick the can down the road -- hoping that long-term problems might simply disappear, or leaving them for someone else to worry about. That is not how President Bush views his job. As he's said many times, he ran for the presidency to confront big challenges, not to pass them along to future Presidents and future Congresses. That's the kind of approach Americans expect from our leaders, especially when it comes to a defining national purpose like Social Security. The President knows that the longer we wait to address the coming crisis, the more excuses that are made for inaction, the more difficult and expensive the job will be down the line. So in this new term, under his leadership, we will save Social Security, and put it on a path to permanent solvency and stability.

Real Social Security reform requires us to move beyond quick fixes and short-term schemes, and that's exactly what we intend to do. To build a strong, workable, bipartisan reform, President Bush has outlined several principles that should guide the effort.

First, out of basic fairness, there must be no changes in Social Security for those now receiving benefits, or for those who are close to retirement. Today's seniors can be certain nobody is going to touch their Social Security. Americans who are at or near the end of their working years have already made their plans, and we must keep faith with them. No one is going to take away benefits of today's retirees, and the program as they know it will stay the same for them.

Second, we must not increase payroll taxes on American workers. Over the program's lifetime, the government has increased Social Security payroll taxes more than 20 times -- and failed to fix the system permanently. If we turn to higher taxes to meet the projected shortfall, the payroll tax would eventually have to be nearly 10 times higher than the original rate when the program was set up. We need to remember that raising taxes will not fix the current system as long as the costs continue to rise relative to the size of income that could be taxed. Trying to fix the system by raising taxes would only buy time, and then future generations would need to come back and raise taxes again and again. Combined with a federal income tax burden that is already too high, endless increases in the payroll tax would take a heavy toll on American workers and their families. If we were to increase taxes this year to fix Social Security, a family of four with an income of $40,000 a year would see $1,400 disappear from their paychecks.

We also have to remember that every new dollar in federal taxation increases the cost of hiring new workers and puts direct downward pressure on the economy's ability to grow. And a slower rate of growth means fewer new jobs in the economy, fewer new workers paying into the system, and an even tougher challenge in the long run. We cannot tax our way out of this problem.

Our third principle is to permit younger workers to voluntarily save some of their payroll taxes in a personal account for their retirement. Each personal account would be under the individual worker's ownership and control. He or she would make regular investments in bonds or stocks throughout their working life ?- and then either use those investments to meet expenses in retirement, or leave them as an inheritance for their children or grandchildren if they so wish.

Here is where Social Security's future should be seen as more than a problem to be solved, it is also a tremendous opportunity for all of our citizens. Personal accounts would not merely help the nation resolve the long-term challenges to Social Security. They would continue a great American tradition of upward mobility and individual independence. Many low-income workers who have nothing to spare after taxes would have a chance to begin saving for their later years. In this way, personal accounts hold the promise of turning every American worker into an owner ?- giving them a retirement fund they control themselves and can call their own.

President Bush and I believe strongly in voluntary personal accounts as part of our commitment to building an ownership society in the United States. One of the great goals of our administration is to help more Americans find the opportunity to own a home, a small business, a health care plan, or a retirement plan. In all of these areas, ownership is a path to greater opportunity, more freedom, and more control over your own life. And this is a goal worthy of a great nation. Everyone deserves a chance to live the American Dream, to build up savings and wealth, and to have a nest egg for retirement that no one can ever take away.

Much of the discussion on Social Security in the months ahead will focus on personal accounts, and some will argue against taking this next logical step in retirement security. I've heard some of those arguments, and I'd like to address them today.

The primary argument against personal accounts is that somehow they are too risky. It's been suggested that many people would spend their retirement in poverty, because the investments they choose will be along the lines of lottery tickets, dice games, and the race tracks. The answer to this concern, of course, is simply to set guidelines, basic standards of safety and soundness when it comes to investment choices. For example, federal employees save for their retirement nest eggs through an investment program called the Thrift Savings Plan, which invests billions of dollars in worker contributions within clear guidelines, with low-cost options, and acts in ways that no one would consider unreasonable or shortsighted. Under similar guidelines, voluntary personal accounts would represent an entirely prudent risk.

Others have made the broader argument that any kind of stock market investing is unwise when it comes to personal retirement. Real-world experience suggests otherwise. In fact, young workers who elect personal accounts can expect to receive a far higher rate of return on their money than the current system could ever afford to pay them. For example, if a 25-year-old invested $1,000 per year over 40 years at Social Security's 2 percent rate of return, in 40 years she would have over $61,000. But if she invested the money in the stock market, earning even its lowest historical rate of return, she would earn more than double that amount -- $160,000. If the individual earned the average historical stock market rate of return, she would have more than $225,000 -- or nearly four times the amount to be expected from Social Security. Over time, the securities markets are the best, safest way to build substantial personal savings.

The charge has also been made that President Bush wants to push everyone into personal accounts. That is not the case. Under our reform principles, having an account of your own under Social Security is purely a voluntary option. We are confident, however, that millions of Americans will find this option attractive. Much of it comes down to a matter of trust ?- whether a citizen would prefer to rely on the federal government to control every aspect of his or her retirement; or would choose instead to be the owner, free and clear, of their own retirement nest egg. Our position is very clear: No one should be required to open a personal account, and no one should be denied that right.

Another argument against Social Security reform with voluntary personal accounts is that the so-called transition costs would be too high. Yet focusing merely on transition costs is to overlook the greater cost of doing nothing. Again, the projected shortfall in Social Security exceeds $10 trillion; that figure is nearly twice the combined wages and salaries of every single working American last year. There will be no -- there will be costs no matter what we decide. But if we neglect the responsibility to act, it will be all the more difficult to preserve Social Security for generations to come.

The latest Social Security trustees' report shows that each year that we wait will add roughly $600 billion to the cost of fixing Social Security for good. That cost is far in excess of any of the so-called transition costs that have been projected for any of the plans put forward by members of Congress. Clearly, inaction imposes the greatest cost of all.

For all the adjustments that are needed to stabilize Social Security system for our children and grandchildren, the most expensive option of all is to deny the obvious problems that keep the system on its current unsustainable path. This we cannot do -? not only because we are facing an economic challenge, but because we are the heirs of a great moral obligation.

As a nation we recognize, as Pope John Paul II has written, that a fully human civilization shows respect and love for the elderly. And a just society ensures that elderly people can grow old with dignity. For that reason our nation established the Social Security system. And that is why, after 70 years, Social Security remains a fundamental commitment of both our political parties.

We will need that bipartisan commitment in the months ahead -- and I believe we will find it. There are strong views on both sides of the aisle, and we should not expect the work to be easy. Yet if we all go forward in good faith, we will uphold a great duty -- keeping the promise of Social Security far into the future and giving millions of seniors, today and tomorrow, the dignity, security, and peace of mind they deserve.