FROM THE OFFICE OF PUBLIC AFFAIRS

March 30, 2005
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Remarks by the Honorable Rob Nichols Assistant Secretary of the Treasury for Public Affairs At a Town Hall meeting with Congressman Dave Reichert Bellevue , Washington March 29, 2005

It's great to be home in the Pacific Northwest. Thank you Congressman Reichert for inviting me here today and for your leadership in Congress.

I very much appreciate the chance to talk with you about strengthening the nation's Social Security system. Workshops like this are an important part of the national dialogue.

Last Wednesday, the Social Security and Medicare Trustees issued their annual reports on the financial health of the programs' trust funds. The numbers contained in the Social Security report left little doubt that the system is financially unsustainable, and in need of repair.

The Trustees' report showed that Social Security cash flows peak in 2008 and turn negative in 2017, and the trust fund itself will be exhausted in 2041. The unfunded obligation, that is, the difference between the present values of Social Security inflows (plus the trust fund) and outflows, is $11.1 trillion on a permanent basis, and $4.0 trillion over the next 75 years.

Now, the President doesn't believe that we should make up that shortfall with tax increases. The report showed just how much we would have to raise taxes to achieve long-term balance: the payroll tax rate would have to be raised immediately by 3.5 percentage points to make the system whole on a permanent basis. In other words, the payroll tax would have to be increased by nearly 30 percent.

That kind of tax increase would have significant, negative economic repercussions. Americans would start taking home less pay, and that's bad for countless facets of our economy. Small employers would be hit especially hard since they pay payroll taxes on each of their employees. A big tax increase could force them to make terrible choices, from lay-offs to health benefit cuts. And it would make hiring new people even more difficult. That's troublesome since most new jobs are created by small firms.

It is also worth noting that payroll tax increases have been the standard "solution" to Social Security's problems, and they have never solved the problem. Payroll taxes have been raised some 20 times since Social Security was established - and it has failed to make the system solvent.

When the President took this issue to the country in his State of the Union Address, he said his objective was to engender a broad national dialogue to get people talking about this issue. He wanted Americans to talk about Social Security, and a national c onversation has begun as a direct result. This workshop today is a perfect example of the sort of nonpartisan dialogue the President envisioned.

We've seen a clear shift in the course of the last month or so from the question: "Is there a problem?" to the question: "How do we fix it?"

Let me point out the key elements of the President's architecture for reform.

If you are 55 or older your Social Security benefits are solid. They will not change. You know that you don't need to change your retirement plan or strategy because of Social Security reform, period. If you're 55 or older, it's your children and grandchildren that you need to be thinking about. They are the ones for whom we need to fix this system.

The issue of Social Security is really just a matter of basic math, and the threat to Social Security in the near future makes more sense when you look at the simple arithmetic. Social Security has enough money now because for decades we have had more than enough workers paying into the system, supporting the retirees drawing benefits.

In 1950, there were 16 workers to support every beneficiary of Social Security - a very comfortable ratio of those paying in versus those drawing benefits. Today there are only 3.3 workers supporting every beneficiary. By the time today's youngest workers - many of you have children in that age group - turn 65, there will only be two workers s upporting each retiree. This issue is one of demography, not ideology.

Just three years from now, in 2008, the first baby boomers will begin to retire. According to the new Trustees' report, the government will begin to pay out more in Social Security benefits than it collects in payroll taxes in 2017 - that's just 12 years from now. By 2041, when younger workers begin to retire, the system will be bankrupt.

We must make Social Security better for those younger workers.

Raising their payroll taxes won't make it better. What the President would like to see, instead, for future generations is an ability to save some of their payroll taxes, in a safe and secure nest egg. Something they could pass on to their heirs. A nest egg that would give workers the prospect of a retirement that is far better than the rapidly-weakening promise of Social Security benefits. These safe and secure nest eggs would give younger workers a chance to earn a better rate of return on their money.

With voluntary personal accounts, younger workers would have the chance to learn about their financial choices, build a safe and secure nest egg and benefit from sound long-term investment in the free market system without disrupting the system of benefits for today's retired beneficiaries.

Additionally, as former Democratic Congressmen Tim Penny and Charlie Stenholm wrote in an op-ed recently, "opposing personal accounts is not a substitute for offering a positive solution for dealing with the challenges that face Social Security." They went on to say, astutely, that they "believe that if Social Security were being created from scratch today, Americans would want to include a way to help everyone build up a nest egg."

Social Security reform that doesn't raise payroll tax rates, that protects benefits for today's seniors, and that improves the system dramatically for our children and grandchildren can be achieved.

If we act now, we can make sure that Social Security, and our economy, is on sound financial footing for our children and grandchildren.

I am absolutely convinced we can preserve and protect social security for today's youth through a thoughtful bipartisan dialogue with Congress. Further, I am convinced we can achieve bipartisan results this year.

Congressman Reichert, thank you again for having me here today. I look forward to your questions.

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