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Mr. Mankiw's remarks suggested that President Bush's plan to let
people put some of their Social Security taxes into "personal savings
accounts" would have to be accompanied by changes in the current system
of benefits.
Throughout the presidential campaign and in remarks after he was
re-elected, Mr. Bush focused almost exclusively on these accounts as a
crucial way to shore up Social Security. Most experts have said that
the accounts must be accompanied by other belt-tightening measures.
When asked about cuts in future benefits, Mr. Bush, however, has said
only that any overhaul should make no changes in the benefits for
people in retirement or near retirement. The president has said that
overhauling the Social Security system would involve "costs," but so
far he has not indicated what those might be.
In his speech, Mr. Mankiw flatly rejected raising taxes as a means
of saving the federal retirement system, which government actuaries say
is on track to become insolvent by 2042 if no changes are made to the
current law. Instead, he took particular aim at a specific feature of
current law under which retirement benefits are linked to the rise in
wages rather than the rise in consumer prices.
"Each generation of retirees receives higher real benefits than the
generation before it," Mr. Mankiw said. Because wages typically climb
faster than inflation, he said, an average worker retiring in 2050
would get benefits that are 40 percent higher, after inflation, than a
comparable worker who retires this year.
Mr. Mankiw emphasized that Mr. Bush has yet to decide on a specific
proposal for fixing Social Security, except that it would have to
include personal accounts and that it would not include raising taxes.
But the issue he highlighted is at the center of a major debate within
the administration and among Congressional Republicans.
Policy analysts say changing the way benefits are calculated could
save trillions of dollars in decades to come. But it would imply
significant reductions from the benefits promised under today's laws.
The idea behind personal accounts is that workers, by making
investments in stocks and bonds, could more than make up the difference
with extra earnings.
In what seemed an effort to anticipate complaints that a new system
would reduce future benefits, Mr. Mankiw warned that the benefits
promised under current law are fictitious because they cannot be
afforded.
"Be wary of comparisons between a new, reformed Social Security
system and current law," Mr. Mankiw said. "Unless a listener is
discerning, empty promises will always have a superficial appeal."
Claire Buchan, a White House spokeswoman, said Mr. Bush had not
decided on a specific plan and refused to comment on any need for
reductions in future benefits.
"The president is committed to strengthening Social Security for
younger workers so they don't face the massive tax increases or benefit
reductions that are certain with inaction," Ms. Buchan said.
The specific issue that Mr. Mankiw highlighted on Thursday, though
seemingly obscure, involves the level at which a person's initial
benefit is set at the time he or she retires. Under the current
formula, which was established by Congress in 1978, the annual benefit
is pegged to increases in average wages while the person was working.
The idea was to keep retirement incomes in line with overall wages
from generation to generation, and analysts said the formula was far
more generous than simply pegging benefits to inflation.
Kent Smetters, a former Treasury official under President Bush who
is now an associate professor at the Wharton School of Business, said
linking benefits to inflation would in itself save trillions of
dollars. But Professor Smetters said the idea was not as tame as it
sounded. Although retirement incomes would not be eroded by inflation,
the guaranteed benefits of retired people would be lower, and lower
than average incomes, as time went on.
Source...
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ASHINGTON,
Dec. 2 - Calling the current system of Social Security benefits unsustainable,
a 
