(Getting ready to do away with Social Security at the same time as doing away with IRS...?)

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Thursday July 19 6:10 PM ET

Social Security Panel Report Says System Broken

By Donna Smith

WASHINGTON (Reuters) - The U.S. Social Security system is ''broken'' and needs to be fixed quickly in order to avoid benefit cuts, tax increases or a huge increase in government borrowing to pay benefits, a draft report by a White House commission warned on Thursday.

The report on Social Security's financial condition by the bipartisan commission appointed by President Bush lays the groundwork for the panel's recommendations later this year on overhauling the retirement system. Bush asked the panel to recommend ways to set up individual accounts through which workers can invest in stocks and bonds.

``The system is broken,'' the commission's co-chairman said in a preface to the 30-page draft report. ``Unless we move boldly and quickly, the promise of Social Security to future retirees cannot be met without eventual resort to benefit cuts, tax increases or massive borrowing. The time to act is now.''

The panel, chaired by former New York Sen. Patrick Moynihan, a Democrat, and AOL Time Warner Chief Operating Officer Dick Parsons, a Republican, plans to discuss the report at its meeting next week.

In the preface, the co-chairmen said workers and retirees have no legal ownership over their Social Security benefits.

``Instead, what they have is a political promise that can be changed at any time, by any amount, for any reason,'' they wrote. ``In any retirement system a lack of legal ownership is a source of insecurity. In one that is under-financed by over 25 percent, it is a problem on its way to becoming a crisis.''

The report is likely to fuel the debate over the strains facing the retirement system as the baby boom generation, those born between 1946 and 1964, begin to retire in the next decade.

SOCIAL SECURITY PROBLEMS SEEN MANAGEABLE

Critics of privatization argue the retirement system is not facing a catastrophe that would require dramatic overhaul. Its problems are manageable and the U.S. bonds held in the trust fund are as sound as the U.S. bonds held by investors all over the world, they argue.

``This report is issued only for one purpose and that is to frighten the American public,'' said Rep. Robert Matsui of California, the ranking Democrat on the House Ways and Means Social Security subcommittee.

Carving out 2 percent of the current 12.4 percent Social Security payroll tax to put it in an individual account, as has been discussed by some administration officials, would require a more than a 50 percent cut in benefits, he said.

Matsui said he agreed that Social Security's financial future needs to be quickly addressed, but said it would be better for Bush to reach out to Democratic and Republican lawmakers to develop a bipartisan plan.

The AARP, a lobbying group for people older than 50, said the commission needed to take a more ``balanced'' view of Social Security's financial problems.

``They certainly have taken every opportunity to exaggerate the problems of Social Security,'' said AARP director John Rother about the draft report. ``We view it as biased and alarmist.''

BUILDING FINANCIAL ASSETS

Bush has promised to propose an overhaul of the system that would include individual accounts workers can invest for themselves. Supporters of private Social Security accounts argue they will provide bigger investment yields and a tangible asset for workers, while the system as it is now structured will force lawmakers to make politically unpalatable choices to make good on promised benefits.

``Today's workers are not accumulating financial assets for the future,'' the report said. ``Workers 'invest' their payroll taxes not in financial assets but in the willingness of future politicians to tax future workers to pay future benefits.''

Social Security, created during the Great Depression in the 1930s, currently collects more in taxes than it pays out in benefits.

But by 2016 that situation will change and the system will begin to draw on its trust fund, which consists of U.S. government bonds, to pay benefits. In order to honor those bonds, the government will have to raise taxes, cut spending, including on Social Security benefits, or borrow money in private financial markets.

By 2038, without any changes in benefits or taxes, the trust fund would be exhausted.

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