The News and Observer (Raleigh, NC)

March 31, 2002 Sunday, FINAL EDITION

SECTION: QUESTION; Pg. A19

Will you get yours?

by David Westphal, Washington Bureau Chief

A din of doomsday predictions about the baby boom's impact on Social Security has drowned out an optimistic view of future benefits from the country's foremost experts. Cutbacks in the national retirement system, they say, are likely to be mild, or even nonexistent.

"My guess is that annual benefits, after inflation, will keep going up," said Eugene Steuerle, who studies Social Security at the Urban Institute, a Washington think tank. "Even after all the reform takes place, the person who is 45 today probably will still get more in retirement, in real dollars, than somebody who just turned 65."

Steuerle is far from alone in this upbeat outlook. Even as Social Security reform heats up in Congress in a debate dominated by warnings about financially threatened retirements, prominent experts say Americans needn't worry that their monthly benefit checks will disappear. "You're going to get 70 to 75 percent of currently promised benefits even if Congress adjourned and didn't reconvene until after you've died," said Henry Aaron, a Social Security scholar at the Brookings Institution.

This optimistic forecast doesn't change the reality of the revenue shortfalls expected as the baby boom generation begins to retire. At some point, Congress and the president must come to grips with this long-predicted problem. But it doesn't mean the sky is falling.

Far from forecasting collapse of the retirement system, leading experts predict Congress will try a combination of fixes to solve Social Security problems, with any action on benefits resulting in a gradual slowdown in annual increases, not outright cuts.

A new report last week strengthened the case for optimism, suggesting that the Social Security problem is becoming more distant and somewhat less severe. In their annual report, the system's trustees extended by three years, to 2041, the date at which reserves are expected to run dry.

It marked the fifth straight year that the projected shortfall has been downgraded. In 1997, experts predicted that funds would disappear in 32 years; now, they're expected to last another 39 years.

This rosier outlook for Social Security isn't entirely new -- it's just been overpowered by a run-for-the-hills tone that prevails in Washington. Both sides in this partisan and polarized debate have found it to their advantage to paint a picture of impending doom. "A lot of the discussion is misleading and self-serving," Steuerle said.

That has long been true of Social Security, one of the most potent and volatile issues ever to hit American politics.

But the debate has become even more fractious because of the escalating fight about whether to privatize part of the retirement system, said Alicia Munnell, a Boston College management professor and Social Security expert.

"If one is interested in changing the nature of the program, to make that case you really have to make an argument that the system is broken," she said.

No benefits slide:

With privatization foes making similarly dire forecasts, many Americans wonder whether they should even count on the monthly government check. Only one-third of adults polled by CBS News last August said they believed the system would have the money available to provide expected retirement benefits.

Yet much of the pessimism is misplaced. The one thing uniting both sides in the privatization debate is a commitment not to let benefits slide.

"Given the far higher returns from private investment, I believe it is possible to devise a system under which the total benefits received by future workers will be substantially higher than today," said Michael Tanner of the Cato Institute, a leading advocate of privatization.

Federal Reserve Chairman Alan Greenspan, offering a rare political prognostication, told a recent retirement summit in Washington that Social Security benefits would be protected. Even if the Social Security trust fund ran out of money, Greenspan said, "I cannot imagine a viable political scenario in which full payment of benefits will not be forthcoming."

For the 75 million Americans born between 1946 and 1964, these matters no longer lie in the future. The first wave of baby boomers reaches the early-retirement age of 62 in just six years, and is fast running out of time to alter financial retirement plans.

For most, Social Security will be the key piece of their retirement security. About two-thirds of the 35 million elderly Americans now receiving benefits get most of their income from Social Security and its average $ 860-per-month payment.

Yet there's no clear indication when Congress will act, and neither party has come up with a comprehensive plan to make ends meet.

Early in George W. Bush's presidency, it appeared progress might come quickly. Bush, in what many viewed as a daring bit of politics, made privatization a major part of his campaign and vowed to take it up with Congress. Since his inauguration, though, his plan to let workers invest a portion of their Social Security money has run into tough sledding.

Last year's economic slowdown, combined with Bush's $ 1.35 trillion tax cut, eliminated the surplus that many politicians consider necessary to finance a reform plan. Trying to revive momentum, the president appointed a commission to make the privatization case, but the effort faded when the group couldn't agree on a single endorsement.

Offering three alternatives, the commission suggested workers be allowed to control investment of 1 percent to 4 percent of their wages. Traditional Social Security benefits would be reduced by varying amounts. Even so, the proposals would postpone the day of reckoning by as little as nine years, with additional federal revenues then required.

Whatever momentum the report hoped to create was quickly crowded out by the Enron scandal. The spectacular collapse of the energy-trading company, and with it the savings of many employees and investors, has given Democrats opposed to privatization a new rallying cry, which they hope to use against Republicans in the fall elections.

"Republicans have a secret plan to cut benefits," said Rep. Robert Matsui of California, top Democrat on the House Social Security panel. "Americans know that Democrats have historically supported Social Security and Republicans have not."

Republicans seethe at the accusation. To think that Republicans "would even consider reducing Social Security benefits is a moral affront," House Majority Leader Dick Armey said.

All of which leaves the issue in the same place it has been for the past 15 years -- unresolved.

Social Security trustees project that benefits will exceed payroll tax revenue by 2017. Very quickly after that, analysts say, the deficits will get much worse unless changes are made. By 2025, the system could be paying out $ 200 billion a year more than it takes in.

The main reason is the upcoming retirement of the baby boom generation, which will double the number of Social Security beneficiaries by 2030, to 70 million. Add to that a sharp drop in birth rates for succeeding generations and the growing amount of time Americans spend in retirement.

In 1940, shortly after Social Security began, the remaining life expectancy of a 65-year-old was 12 1/2 years. Today, it's 17 1/2 years. The upshot is that the ratio of workers to beneficiaries, now 3.4-to-1, is expected to fall below 2-to-1 by the middle of the 21st century.

"It's the double whammy -- more elderly, not as many workers -- that makes this so difficult," Steuerle said.

Keeping the system solvent over the next 75 years, according to the Social Security Administration, would require a 13 percent decline in benefits or a 15 percent increase in the payroll tax.

As bleak as all that sounds, though, ideas abound to avoid Draconian changes in Social Security.

Avoiding big hits:

One is to limit the growth of benefits paid to future retirees, especially workers now in their 20s and 30s. A key reason senior citizens have made such rapid economic gains in recent decades is that benefits are adjusted upward to reflect both cost-of-living increases and wage growth.

Between 1957 and 1992, income after inflation doubled for people ages 65 and older, far outdistancing the gains of younger groups. Meanwhile, the poverty rate for retirees plummeted by two-thirds, and now ranks with that of the rest of the population.

Slowing benefits growth is likely to be part of a final deal. "I think most people think there should be some adjustment in the way the cost-of-living calculation is made," Munnell said.

Another proposal would speed up the schedule for increasing the standard retirement age to 67. The transition, from age 65 to 67, isn't scheduled to be complete until 2027 but could be moved up.

Other plans would raise the payroll tax on workers or increase taxes on beneficiaries.

Finding a solution is important not only for Social Security. Yet to come is an arguably even tougher generational problem plaguing Medicare, the nation's health insurance program for the elderly.

According to Social Security trustees, it would take a 38 percent cut in benefits to keep the Medicare trust fund in balance through 2075.

Left untouched, these two programs, Medicare and Social Security, could expand so rapidly that by 2075, they could amount to 15 percent of the overall economy, just shy of the proportion now claimed by all federal spending.

Although these problems are often portrayed as emergencies or crises, there's no guarantee that action will happen anytime soon. Some politicians say there might be a window next year, after the congressional elections. Others suggest the clock might need to tick down a bit more before Congress feels enough pressure to act.

In 1983, the last time Social Security received a major rescue, the system had already fallen into the red. This time, that's not expected to happen for another 15 years, meaning it could be a long time before a resolution is at hand.

Social Security trustees concluded their latest report with a reminder to Congress that "the sooner adjustments are made, the less abrupt they will have to be."

Delaying a solution isn't ideal for future retirees. But it wouldn't be the end of the world, either.

"By rights, this issue should be dealt with now," Munnell said. "But I just don't think people have to worry too much. I don't see a big threat of sharp cutbacks."