November 27, 2002

November 27, 2002 | Commentary on Social Security

ED112702a: A No-Account Debate

"Grandma Doesn't Scare Anymore," reads the headline of a post-election Wall Street Journal editorial noting the success of candidates who back Social Security reform. Seniors are "willing to listen to politicians who tell them the truth about the system's long-term problems and how to fix them."

Good news, indeed. But opponents of reform still can feed Grandma a steady diet of misinformation. And if the winning candidates hope to create a system of personal retirement accounts, they must refute these falsehoods.

Truth-telling is important, because the long-term economic health of Social Security is far worse than many are willing to admit. "There isn't any crisis," writes New York Times columnist Paul Krugman. "The system looks good for 40 years, and with a bit of extra resources can survive indefinitely."

It's a pleasant fiction -- but a fiction nonetheless. What happens at the end of those 40 years? That's when Social Security runs out of money. It's now running a surplus, but as the number of young workers drops and the number of retirees rises, that will change. By 2017, the program will begin paying out more in benefits than it collects in taxes.

"Eventually only two options will be left to those who reject personal accounts," my Heritage Foundation colleague David John says. "They can raise taxes, or they can cut benefits." Some choice.

Will "a bit of extra resources" do the trick? Sure, if your goal is to buy time. Take the proposal to raise Social Security taxes by an additional 2 percent of income. We'd still go from running surpluses to running deficits -- only the shortfall would begin in 2023 instead of 2017. And after that? Another 2 percent hike? Maybe 5 percent?

When they're not mischaracterizing the problems Social Security will face, anti-reformers are spreading misinformation about personal accounts. One common charge is that switching things around to let people invest some of their Social Security taxes in personal accounts would be too expensive. "Transition costs" would range from $1 trillion to $1.3 trillion in the first 10 years alone. But fixing the system is going to take additional money, no matter what. The only question is how much.

If we make no changes, we'll need $6 trillion just to make sure the Social Security trust fund can pay benefits through 2041, and an extra $19 trillion to get us through to 2077 -- a total of $25 trillion. But Social Security's own actuaries have shown that, if personal accounts were allowed, it would take only $7 trillion to assure retirement security -- to fix today's broken system for good.

So the question is: Should we pay a smaller amount now, before the system begins failing? Or do we wait and pay far more down the road, when the crisis hits? Sorry, foes of reform: If we reject personal accounts, no third choice exists.

What about administrative costs? Surely, critics say, they'll be so high that personal accounts will be too expensive for low- and middle-income Americans. But that's not the case, John says. One of the largest managers of retirement savings, State Street Trust, estimates that the average worker would pay no more than $7 a year to manage his or her account.

Others say recent stock-market losses prove the folly of personal accounts. But only funds invested in short-term or high-risk funds would be endangered -- and that's not where you put your retirement money. Retirement investing takes place over a period of decades, and stocks always perform well over the long haul -- about 7 percent compounding annually since 1802, and that counts every recession and the Great Depression.

Clearly, Election Day set the stage for a worthwhile debate. Let's hope reformers take advantage of it.

Edwin J. Feulner, Ph.D.,  is president of The Heritage Foundation (www.heritage.org), a Washington-based public policy research institute.

About the Author

Edwin J. Feulner, Ph.D. Founder, Chairman of the Asian Studies Center, and Chung Ju-yung Fellow
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Related Issues: Social Security