Summary
A Kerry ad claims “Bush has a plan to cut Social Security benefits by 30 to 45 percent.” That’s false. Bush has proposed no such plan, and the proposal Kerry refers to would only slow down the growth of benefits, and only for future retirees. It was one of three possible “reform models” detailed by a bipartisan commission in 2001.
The ad also says nothing about what Kerry would do to address the troubled state of Social Security finances. Unless taxes are increased, the system’s trustees say currently scheduled benefits would have to be cut 32%.
Analysis
This misleading ad, released Oct. 17, is one of a very few attempts made by either side to discuss the troubled state of the Social Security system. It’s an issue that will confront the winner of this campaign when the first of the post-World-War II Baby Boom generation reaches early-retirement age in 2008.
“The Truth is Coming Out”
Kerry Ad:
“January Surprise”Announcer: The truth is coming out. . . George Bush has finally admitted he intends to privatize social security in a second term. “I’m going to come out strong after my first swearing in,” Bush said, “with. . . privatizing social security.” First George Bush threatens social security with record deficits of over $400 billion. Now Bush has a plan to cut social security benefits by 30 to 45 %. The real Bush agenda? Cutting social security.
The Kerry ad starts by saying “the truth is coming out,” and then proceeds to misinform voters by saying “Bush has a plan to cut Social Security benefits by 30 to 45 percent.”
It’s a familiar campaign ploy, similar to the tactic used by Bill Clinton in 1996, when his ads accused Bob Dole of supporting a $270 billion “cut” in Medicare. In fact, what Dole supported was a slowdown in the projected growth of Medicare spending, at a time when Clinton himself was proposing a $124-billion reduction (without, of course, calling his own plan a “cut.”)
The Kerry ad is wrong on several counts:
• Bush hasn’t proposed any specific plan. This ad refers to one of three different possible “reform models” that were detailed in the final report of the President’s Commission to Strengthen Social Security in December 2001. Bush hasn’t endorsed any of them. He may propose something similar if elected, but so far hasn’t spelled out for voters exactly what he has in mind.
• The plan the Kerry ad refers to doesn’t affect benefits for current retirees at all, and Bush has said consistently that whatever plan he proposes won’t cut benefits for those now drawing them, or those nearing retirement. Stating that Bush plans to “cut Social Security benefits” will be heard by many seniors as a plan to cut their benefits, which isn’t true.
• Even for future retirees, benefits will grow under the “reform model” the Kerry ad refers to. That model would reduce the rate at which the starting point for future benefits is expected to grow, by increasing starting benefits to keep pace with rising prices, rather than with rising wages as has been the case since 1977.
The backup for the ad provided by the Kerry campaign cites a study issued in July by the Congressional Budget Office of “plan 2” contained in the final report of the bipartisan President’s Commission to Strengthen Social Security. The commission was co-chaired by the late Sen. Daniel Patrick Moynihan of New York and by Richard D. Parsons, who is currently Chairman of the Board and Chief Executive Officer of Time Warner Inc.
The commission stated that all three of the possible “reform models” it examined would allow for increases in benefit levels paid to future retirees:
Commission’s Final Report: In fact, every Commission Reform Model will increase benefits at least as fast as inflation, ensuring that no future generation of retirees receives less purchasing power than today’s retirees. Hence, fears that benefits will be cut or retirees thrown into poverty are simply false.
The commission said that continuing to peg future benefits to rising wages would require a large payroll tax increase and is “not affordable.” Instead the commission proposed to peg future starting benefits to rising prices for two of its model plans:
Commission’s Final Report: The current benefit formula increases the starting benefit from year to year at the rate of wage growth, which is generally faster than is required to maintain purchasing power. This rate of benefit growth is not affordable given current system revenues. Fortunately, current payroll tax rates are sufficient to afford benefits that grow at least as fast as inflation.
The “30 to 45 percent” figure in the Kerry ad is from the Congressional Budget Office study and found that “first-year real benefits are projected to remain generally constant.” In other words, the starting point of benefits paid to future retirees would be unchanged in terms of purchasing power from those paid currently.
That would be less than the higher rates resulting from continuing current practice, which Congress adopted in 1977 despite warnings that it could not be sustained financially.
The CBO found that under Plan 2, first-year benefits paid to retirees born in the 1980s would be 30 percent lower for middle- and upper-income persons than under a wage-indexed system. (The reduction would be less for low-income persons.) The figure would reach 45 percent only for future retirees born in this decade, most of whom are yet unborn.
So Kerry’s ad is incorrect. It would have been accurate to say, “Bush may propose to hold benefits for future retirees constant instead of letting them grow faster than inflation.” But that’s not nearly as scary.
Private Accounts Don’t Require Indexing Change
It should also be noted that creating private Social Security accounts, as Bush proposes, doesn’t require substituting price-indexing for wage-indexing. Price-indexing could also be used to hold down the future cost of the current system as well. In either case, wage-indexing propels the starting point of future benefits upward more rapidly, and costs more.
Also, the proposed price-indexing wouldn’t affect annual cost-of-living adjustments for retirees once they begin receiving benefits, only the level at which benefits are set in the first year they are paid. After the first year, benefits would continue to be increased yearly to maintain purchasing power.
An Issue Undebated
There are a host of unanswered questions about Bush’s intentions regarding Social Security, and the campaign so far hasn’t shed much light on any of them. Bush has said he wouldn’t increase payroll taxes, but maintaining benefits for current retirees while allowing some portion of current payroll taxes to go into privately owned accounts will cost at least $1 trillion and perhaps much more, depending on what estimates are used. Bush hasn’t said where the money would come from.
Kerry, on the other hand, hasn’t said how he would preserve the current system. Social Security’s finances are unstable, and its trustees stated in the most recent annual report that by the year 2078 it will require a payroll tax increase of nearly 50% to maintain the currently scheduled rise in benefit levels. If taxes are not increased and no other changes are made, benefits would have to be cut 32% that year.
Media
Watch Kerry Ad: “January Surprise”
Sources
“New Kerry Ad Exposes Bush’s January Surprise – Social Security Privatization,” news release, 17 Oct 2004.
Congressional Budget Office, “Long-Term Analysis of Plan 2 of the President’s Commission to Strengthen Social Security,” 21 July 2004, Revised 30 Sep 2004.
President’s Commission to Strengthen Social Security, ” Strengthening Social Security and Creating Personal Wealth for All Americans,” final report, 21 Dec 2001.
Brooks Jackson, “Truth Was An Occasional Casualty In Sunday’s Debate,” CNN.com, 7 Oct 1996.
“2004 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Disability Insurance Trust Funds,” 23 March 2004.