August 9, 2005

August 9, 2005 | Commentary on Social Security

Social Security's Second Career

If Social Security were a worker instead of a government program, it probably would have retired several years ago. After all, the New Deal program turns 70 on Aug. 15.

While no one wants to send Social Security off into the twilight, this is the perfect time to add to its responsibilities. It has been successful as a retirement program. Now it's time to improve it by also making it an ownership program that will allow every worker to create safe and secure nest eggs for their retirement, and pass on what they don't use to the next generation.

Some history is in order.

When Social Security was created in 1935, the retirement age was set above the average male life expectancy. It was designed so the average man would never collect any Social Security benefits, which were intended only to help those who "outlived" their savings. Luckily, that's changed. People live longer, and future generations can expect to do even better.

But that means ever more retirees depending on ever fewer workers. There were 42 workers for each retiree in 1945. Today there are only 3.3. And by 2025, the ratio will drop to about two workers per retiree.

Unless we fix Social Security, we'll eventually have to require each married couple to support the benefits of one retiree while still paying their own household expenses. The only way to do that would be to raise taxes on that couple, slash benefits for that retiree, or both.

But there's a better way: Create personal retirement accounts for workers. These voluntary accounts (no one should be forced to invest in something, even if it will provide long-term benefits) would allow each employee to invest a certain percentage of his or her Social Security taxes in a personal account.

Heritage Foundation research shows these accounts would start helping workers save right away -- which is why it's critical to get them up and running as soon as possible. For example, a married couple in their early thirties with each spouse making between $50,000 and $55,000 loses $608 every month that a personal-account plan isn't implemented. That's more than $7,000 a year -- real money that would have been available to them when they retired, if they'd been able to invest in a PRA.

PRAs would allow even low-income earners to build up a substantial nest egg over time. And the workers would actually own their nest eggs. They could spend it as they wish, using it all to finance their golden years or conserving some to pass on to their heirs.

They would also correct one of the biggest problems with today's Social Security -- the fact that it's a bad deal for those who die young.

Since today's Social Security provides only a guaranteed benefit with no possibility of ownership, it's possible for a worker to pay Social Security taxes (FICA on your paycheck stub) for decades, die suddenly before retirement and receive nothing more than a one-time $255 death benefit. With PRAs, all the money that worker had saved up would be passed along to his heirs to provide at least some comfort and security at a difficult time.

For the next decade, Social Security will take in more in payroll taxes than it pays out in benefits. So this is the time to use those surpluses to create PRAs for every worker.

Sen. Jim DeMint, R-S.C., and Rep. Jim McCrery, R-La., recently introduced legislation that would do just that. Their bill would set aside some $80 billion in its first year alone. This money would be invested in regular-issue government bonds in accounts actually owned by workers. That's a vast improvement over the current system, under which Social Security surpluses are returned to the government's general fund and immediately spent on government projects like building indoor rain forests in Iowa.

Allowing workers to control some of their own Social Security taxes would have the added benefit of forcing Congress to end its shady accounting practices. Today's Social Security surplus allows lawmakers to hide tens of billions' worth of borrowing. But if that surplus were invested in PRAs, Congress would have to borrow the money openly in financial markets (exposing the real cost of deficit spending) or slash spending to more reasonable levels.

Happy Birthday, Social Security. And here's to the next 70 years, with personal accounts and retirement security for all.

Ed Feulner is president of The Heritage Foundation (, 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
Founder's Office