March 12, 1999 | Executive Memorandum on Social Security
As the congressional debate over Social Security's impending financial crisis intensifies, some lawmakers may be tempted to pass the expedient rather than real reforms that will stand the test of time and assure retirement security for future generations of seniors. Social Security reform is too important to working Americans for Congress to allow short-term political considerations to triumph over sound policy. Consequently, to qualify as real Social Security reform, a proposal must meet at least the following five criteria:
As a first step to saving Social Security for future generations, Congress should pass a law giving every already retired American a contract that provides a legal guarantee of his or her Social Security retirement benefits. This should include a written U.S. Treasury-backed certificate specifying the level of guaranteed benefits. Furthermore, each American who reaches retirement age and applies for benefits should receive a similar contract.
Former Congressional Budget Office (CBO) director June O'Neill warned that the era of budget surpluses could be fairly short. Although everyone hopes that the projections of lasting budget surpluses are accurate, any long-term economic forecast is volatile. Just last August, CBO projected the aggregate surplus for fiscal years 1999 through 2008 to be $1.54 trillion. The January 1999 aggregate projections for the same period were $2.65 trillion, a 72 percent increase. Over the next few years, these forecasts could just as easily drop-especially given Congress's propensity to spend. When the inevitable economic slowdown hits, deficits likely will return. At that point, if Social Security personal retirement accounts depend on a surplus, Americans will be denied the opportunity to improve their retirement income.
Today's Social Security system provides a stable level of retirement income and protects against catastrophic losses through Old-Age, Survivors and Disability Insurance. But it does not allow workers to accumulate cash savings for their own retirement goals or to pass on to their heirs. This gap needs to be filled. The best way to do this is to establish, as a part of Social Security, a system of personal retirement accounts that are financed with a portion of the existing taxes that now go for Social Security retirement benefits.
These guarantees must be backed by insurance offered by private carriers and reinsured through a federal agency. Retirees whose personal retirement account includes enough money to exceed the guaranteed benefit should be allowed to increase the income they receive through an annuity, take the excess in cash, or leave the money to their heirs.
Real Social Security reform not only will protect current retirees' income, but also will provide higher retirement income for working Americans, regardless of whether Washington faces deficits or surpluses. The only effective way to ensure that Social Security provides this income is to allow workers to invest a portion of their payroll taxes in personal retirement accounts.
David C. John is Senior Policy Analyst for Social Security at The Heritage Foundation.