Former MN congressman Tim Penny back in Social Security spotlight

Listen to this article

What do the war in Iraq, embryonic stem cell research and former Minnesota congressman Tim Penny have in common?

Each was mentioned in President Bush’s State of the Union address on Feb. 2.

Penny, who represented southeastern Minnesota’s First District as a Democrat from 1982 through 1994, was an Independence Party candidate for governor in 2002 and is now a senior fellow at the University of Minnesota’s Hubert H. Humphrey Institute of Public Affairs.

He was in Washington when Bush delivered his address to a joint gathering of Congress and mentioned Penny’s idea to change Social Security. He received at least half a dozen calls to his hotel room from reporters within 30 minutes after the speech ended.

The Social Security program was designed by the Franklin D. Roosevelt Administration during the Great Depression to provide retirement benefits. Due to demographic changes, far fewer workers are paying payroll taxes to support a growing number of retirees. The number of beneficiaries is expected to grow further in three years when the baby boom generation starts to retire.

But the severity of the Social Security problem is a matter of debate among lawmakers in the nation’s capital.

Bush maintains the system is in crisis and heading toward insolvency by 2042. Others, including U.S. Rep. Martin Sabo, D-Minn., who announced Social Security legislation last week, accuse the Bush administration of “totally exaggerating the problem” in order to dismantle the system.

Penny, a member of Bush’s bipartisan Commission to Strengthen Social Security, believes that Social Security needs to be fixed without delay.

“I think the problem is real, and it is close enough that we ought to worry about it,” Penny said.

Under the current system, Social Security will experience a cash flow crunch around 2018 that will force lawmakers to look for ways to put money in the system’s trust fund.

“Once you get beyond 2018, there are no easy options,” Penny said.

As a congressman, Penny saw pressures coming to bear on Social Security and voted in 1983 to increase age of eligibility for the program.

“We could see, even then, that with the large baby boom generation and relatively smaller younger working generation, that we were heading toward some cost pressures in the program,” Penny said.

After he left Congress, Penny continued to think about Social Security. In hindsight, revenues from the increased retirement age and payroll tax should have been used for personal savings accounts, he said.

“When I left Congress, I began to think about what I would have done differently if I would have been a congressional leader back in 1983. Instead of voting for the Greenspan Commission report, which raised the retirement age and raised payroll taxes on the promise that the higher payroll taxes would be saved for the future, I probably would have said the higher payroll taxes would have gone into these personal accounts, so that in addition to a safety net, we would have some money that would be saved in the name of each individual taxpayer,” Penny said.

Bush’s Social Security plan allows workers to divert money into these private accounts.

When making reference to Penny, Bush argued in his State of the Union address that the system would reach insolvency if action isn’t taken soon.

The president said: “Fixing Social Security permanently will require an open, candid review of the options. Some have suggested limiting benefits for wealthy retirees. Former Congressman Tim Penny has raised the possibility of indexing benefits to prices rather than wages. During the 1990s, my predecessor, President Clinton, spoke of increasing the retirement age. Former Senator John Breaux suggested discouraging early collection of Social Security benefits. The late Senator Daniel Patrick Moynihan recommended changing the way benefits are calculated. All these ideas are on the table.”

Penny would change the Social Security formula so that a retiree’s lifetime earnings are multiplied by a price index rather than a wage index.

“When you wage index, we’re promising a more generous increase than you would need simply to keep pace with inflation,” Penny said.

This adjustment would go a long way toward fixing the system, he said.

“A little known fact about Social Security is that we promise future retirees bigger benefits than today’s retirees. If we simply offer inflation-adjusted future benefits so that in real dollar terms a retiree tomorrow would be as well off as a retiree today, we would eventually return Social Security to solvency over the long term,” Penny said.

Demographic changes affecting working and retirement-age Americans hasten these needed changes.

“If payroll taxes in the future will not be sufficient to pay promised benefits in the future, why are we promising higher benefits than the system can support? So price indexing brings future promised benefits in line with payroll taxes that support them,” Penny said.

However Social Security is dealt with, Penny said Bush should send a general outline to Congress that will then be crafted into the final product.

Another Social Security reform proposal came out of Minnesota last week from Sabo, who said his plan “fixes the projected shortfall without dismantling the system as we know it.”

Sabo said at a press conference at the state Capitol that his legislation will “preserve” Social Security without requiring payroll tax hikes or benefit cuts.

Sabo’s plan would set the interest rate paid to the Social Security trust fund by the Treasury at 4.7 percent above inflation.

“With targeted yet simple adjustments to interest paid to the Social Security trust fund, we can fix the longer-term solvency problem without raising payroll taxes or cutting the benefits that Americans have earned through their own contributions to the system,” Sabo said. “If the Social Security trust fund were a home mortgage, my legislation changes it from an adjustable-rate mortgage to a fixed-rate mortgage.”

Sabo acknowledged his bill will “probably not” be considered by the Republican-controlled House.

According to Congressional Budget Office projections, the Social Security trust fund will be exhausted by 2052 based on a 3.3 percent rate over inflation. Sabo said his bill, with its rate above the CBO’s forecast, would ensure the fund’s solvency through 2080.

The Social Security trust funds are used for purposes other than Social Security, which leaves Penny to wonder where the money will be obtained to pay for the Sabo proposal.

“Unless we’ve got a surplus in the rest of the budget when the time comes to put money back in the trust fund, there are only three ways that you can repay the trust fund, and that’s to cut other government spending, or to raise other government taxes or to borrow money out in the private sector to put back into the trust fund,” Penny said.

At least once a month, Penny travels to Washington, where he is involved in groups, including the budget watchdog Concord Coalition and the libertarian Cato Institute. He is also involved in a Social Security education project called For Our Grandchildren.

While Penny is still an Independence Party member and would love an opportunity to “kick both major parties in the teeth,” he has no ambitions to run for office at the moment.