November 26, 2007

November 26, 2007 | Commentary on Social Security

Building Real Wealth

Every silver lining, it seems, comes with at least a little bit of cloud.

Take Individual Retirement Accounts and 401(k)s. They've made the U.S. into a nation of investors. Millions of people earn billions of dollars by purchasing stocks and bonds through retirement accounts.

But the one drawback is that, by turning Americans into investors, IRAs mislead people about the future of Social Security.

You see, when you put money in a retirement account, you're investing real money and earning real returns. For example, a $1,000 investment in the Dow Jones industrials in 1981 was worth $12,238 by the end of 2006.

Social Security doesn't work that way. You and I fund it through our payroll taxes. And although there's supposedly a "trust fund," it only holds IOUs. The government actually spends every Social Security tax dollar it collects. Yes, it collects more than it pays out in benefits (for now), but no money is being set aside.

Instead, the surplus is turned over to the Treasury. In return, the trust fund gets an IOU -- essentially, a promise from one wing of the government to pay another wing of the government back.

So the trust fund isn't an asset the way an IRA is. It's an unfunded obligation. There are about $2 trillion worth of IOUs in the trust fund. That's an awfully big promise for tomorrow's taxpayers to make good on. And the day of reckoning fast approaches.

According to the program's trustees, in just 10 years Social Security will start paying out more in benefits than it collects in taxes. And the shortfalls will soar quickly as more and more baby boomers retire, leaving fewer workers to pay into the system each year.

This fact ought to concern all the presidential hopefuls, especially since in 2009 the annual Social Security surpluses that Congress has been borrowing and spending will begin to shrink. With less money pouring in each year, lawmakers will either need to borrow more or spend less.

Recently, Democratic hopeful Barack Obama did introduce a plan. He told NBC's "Meet the Press" he'd favor raising payroll taxes. This wouldn't work, because while it would bring in more money, the extra cash that's collected would still be spent immediately. So a tax increase, no matter how large, doesn't make it possible to save money up for the future.

Obama's leading opponent, Hillary Clinton, understands that. "If you lift the cap completely, that is a $1 trillion tax increase. I don't think we need to do that," she said during a debate. Unfortunately, Clinton also actively opposes the reforms needed to stabilize Social Security itself and give workers the tools to build a truly secure retirement.

The best way to put Social Security on solid financial ground is to create retirement accounts that individual workers would own. Each worker should be allowed to control a portion of the payroll taxes Washington takes from his or her paycheck. As with an IRA, the worker would be able to invest and grow this money.

An alternative to such accounts would be massive tax increases and benefit cuts, two options that would be bad for our economy and for any politicians who supported them.

Even this won't be enough, though. Lawmakers will still need to reduce spending elsewhere so there's enough money available to fund the individual accounts. Fixing Social Security will be a long and expensive process, and the cost rises each year we delay.

Tens of millions of Americans have already joined the investor class. We need to open that option to millions more and allow them to build real wealth for the future. That's smarter than counting on Uncle Sam to keep his fiscally irresponsible promises.

Ed Feulner is president of The Heritage Foundation (heritage.org).

About the Author

Edwin J. Feulner, Ph.D. Founder, Chairman of the Asian Studies Center, and Chung Ju-yung Fellow
Founder's Office