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Special Report

Where Are We in the Social Security Debate?

This is a partial transcript of "Special Report With Brit Hume," April 15, 2005, that has been edited for clarity.

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(BEGIN VIDEO CLIP)

GEORGE W. BUSH, PRESIDENT OF THE UN ITED STATES: There was a Social Security expert named Robert Pozen, who happens to be a Democrat, proposed a progressive mix for wage and price indexing. Well, I welcome ideas. It doesn't matter if it's a Republican idea or a Democrat idea. The idea is to come together and fix this for generations of Americans to come.

(END VIDEO CLIP)

JIM ANGLE, GUEST HOST: That was President Bush last month praising Robert Pozen a Democratic who served on the president's commission to strengthen Social Security. Pozen's ideas about a change in benefits are the basis for some proposals on Capitol Hill to fix the solvency problems in Social Security for the next 75 years.

Mr. Pozen, now the chairman of MFS Investment Management, joins me from Bolton.

Mr. Pozen, thanks for being here.

ROBERT POZEN, FMR. MEMBER OF SOCIAL SECURITY COMMISSION: Thanks for having me, Jim.

ANGLE: Let me ask you, first, where are we in this debate over Social Security? It gets very confusing, because there are two things, solvency of the system and the president's proposal for personal accounts.

POZEN: We're a bit at a stalemate, because, so far, the president has been pushing very hard on a certain type of personal account, the carve-out account. And many Democrats have said, no way, Jose, they won't go for that type of personal account.

And what we really need to do is to get to the more important subject of solvency. If we can start to talk about solvency, then I think we then can reach a consensus. And then when we get solvency nailed down, we can talk about what sort of sweeteners we need for the package.

It's like we have been talking about the dessert, but we haven't gotten to the spinach yet.

ANGLE: Well, let's talk a little bit about the spinach. The White House is suggesting now that it will start focusing a little bit more on the solvency questions. And that's natural, because the legislative phase of this operation is about to begin with hearings on Capitol Hill and legislation coming forward.

Once you start in that discussion about how to make the system solvent, how does that move the debate forward? How does that get you closer to the dessert, as you described it?

POZEN: Well, I think there is a consensus among both Democrats and Republicans that we have a serious long-term problem. We're not in a crisis now, but we have a predictable crisis in the future. And there are a variety of things that we can do to help move the system forward.

I've talked to both Democrats and Republicans, and there is a lot of support for something like progressive indexing. This is basically a way in which you protect the Social Security benefits of low-wage workers and you slow down the growth of these benefits for middle- and high-wage workers.

This is justified because, for most low-wage workers, the only retirement income they have is Social Security. So we really have to preserve that.

By contrast, for most middle and higher income wages, wage workers, they have IRAs, they have 401(k)s. These are tax-subsidized accounts, and they supplement the retirement income that they have from Social Security.

ANGLE: Now, let me make sure that I have this straight. As I understand it, wage indexing -- well, wages grow about 1 percent faster a year than inflation for the most part. And the way it's now said, initial benefits are based on wage indexing.

If you went to price indexing, which is about a percent lower a year, for the most part, it would mean a slower growth in one's benefits. You're saying full wage indexing, in other words, higher benefits, for those at the low income end of the scale, and full price indexing for those at the upper incoming, and a sliding scale in between, is that right?

POZEN: That's correct. That's exactly right.

And as I said, I think that it's justified because we have to look at government support of retirement income overall. And, for instance, in 2004, for IRAs and 401(k)s, the tax subsidies for those were roughly $50 billion to $60 billion. And most of those tax subsidies went to middle and higher earners.

So if we want to make the system neutral in terms of government support, we have to help low-wage workers a little more on Social Security, since they are mostly entirely dependent on Social Security for their retirement income. They have very little in the way of IRAs or 401(k)s.

ANGLE: You know, that is one of the arguments the president makes and others make for personal accounts, that low-income workers don't have a chance to save. So if we don't have personal accounts inside Social Security or added on to Social Security, how do the poor ever get a chance to build some retirement wealth?

POZEN: Well, personal accounts is one way for them to build retirement wealth. And the president has talked about carve-out accounts, which means taking two or three percent of the 12.4 percent we put in payroll taxes into personal accounts.

ANGLE: Carve-out meaning taking some of your taxes that you now pay and putting them in an account, as opposed to an add-on, which would be additional moneys from outside Social Security?

POZEN: Correct. But we have other proposals that have come forward for add-on accounts. And today, Al Hubbard, who works -- is the lead person in the White House on this, said he was flexible on this.

For instance, an add-on account could say we encourage low-income workers to do IRAs by providing them with a refundable tax credit to match some of their contributions to IRAs. And this would be the sort of thing that we could do to encourage personal savings on the part of low-wage workers.

We also have a number of sort of systems which are called presumptive contributions where, like, in a 401(k) system, you say presumptively everyone is going to put 1 or 2 percent of their wages into a 401(k) system, but if you don't like it you can opt out.

Behavioral economists have shown us that if you have such an opt out system, most people will tend to save and a relatively small portion will opt out of the savings vehicle.

ANGLE: Mr. Pozen, just seconds left. Tell me how much your plan would save in Social Security, very quickly.

POZEN: Progressive indexing would cut roughly 70 percent off the long-term deficit. The long-term deficit is now...

ANGLE: All right, sir.

POZEN: ... has a present value of about $3.8 billion.

ANGLE: OK. That's all the time we have for. Thank you very much.

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