January 17, 2002

January 17, 2002 | Commentary on Social Security

What are you for?

Whenever a congressional hearing turns into a gripe session, Rep. Thomas Davis III likes to cut it short with this: "Don't tell us what you're against. Tell us what you're for."

The Virginia Republican's message ought to be extended to those who oppose any proposal to let workers create their own Personal Retirement Accounts (PRAs) as part of Social Security.

Last year, lawmakers offered three plans -- and President Bush's Social Security commission came up with two -- that would allow workers to do just that. Despite wide variations in the methods proposed, the Social Security Administration itself has determined that all five would eliminate the growing funding problems of America's public pension system.

Naysayers loudly condemned each proposal. Yet the best opponents have offered in the way of alternatives are feeble calls for "modest changes," in the words of The New York Times. Or to urge, as did Max Richtman, executive vice president of the National Committee to Preserve Social Security and Medicare, that we "shelve the idea of privatization altogether and dust off the true meaning of Social Security: all Americans sharing the financial risks of growing old or being widowed, orphaned or disabled."

The costs of switching to PRAs -- and of bailing out those whose investments fail -- would be prohibitive, they say. Nonsense. These so-called transition costs are certainly less than the cost of doing nothing. And investment tools abound that virtually ensure modest gains on the portfolios held in PRAs.

If we do nothing, then by 2016 Social Security will begin paying out more in benefits than it collects in taxes. By 2038, we will have spent the entire "trust fund." But it's worse than it sounds. There's no money in the fund, only IOUs for $5 trillion. Congress has to find a way to meet those obligations.
From then on, it gets even worse.

Within 75 years, we'll owe retirees $22 trillion more than we'll have. That's more than seven times the current federal budget. We either can pay 75 cents for each dollar of promised benefits or face a tax increase that will dwarf any ever conceived.

There's a better way. Rather than spend $5 trillion for the privilege of hurtling toward fiscal oblivion, we could spend the same money, more or less, to create a "Social Security Part B." We could allow workers -- if they choose -- to divert up a portion of their Social Security contribution to personal accounts.

Workers who invest in a conservative portfolio of super-safe "blue chip" stocks and guaranteed government bonds could expect a 5 percent return on their investment, as opposed to 1.2 percent under Social Security. Thanks to the miracle of compound interest, even taxi drivers and doormen could amass a third of a million dollars upon retirement, and two-earner couples with average incomes could earn up to $1 million for retirement.

The same $5 trillion we'd spend plugging a hole that will only widen with time then could be applied to the supposedly forbidding "transition costs." These costs cover the shortfall that the money being diverted to personal accounts would create. Retirees would receive more income, and -- if they die early or don't spend it all -- they could leave the money they earn to their children, further easing pressure on Social Security.

Eventually, the funding shortfall that now threatens to engulf our national treasury would end. The federal government would no longer have to decide between massive tax hikes and wholesale Social Security benefit cuts.

And if PRAs aren't the solution to America's looming Social Security crisis, would the stay-the-course crowd please tell us how they would solve the problem? What "modest changes" will do the trick?

We know they oppose the ideas that even the Social Security Administration says will work. We know they're good at scaring people into thinking that personal accounts will lead to streets full of aged beggars. What we don't know is what they're for.

David John is a senior policy analyst for Social Security at The Heritage Foundation, a Washington-based public policy research institute.

About the Author

David C. John Senior Research Fellow in Retirement Security and Financial Institutions
Thomas A. Roe Institute for Economic Policy Studies

Related Issues: Social Security

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