President George W. Bush's support for Social
Security reform, together with strong public support for allowing
workers to place some of their payroll taxes in personal retirement
accounts, makes it much more likely that Congress will soon
consider the issue. However, some lawmakers may be tempted to pass
a band-aid that avoids the reforms necessary to assure real
retirement security for future generations.
Social Security reform is too important to
working Americans to allow short-term political considerations to
triumph over sound policy. To qualify as real Social Security
reform, a proposal must meet at least the following six
criteria:
- The benefits of current retirees and those
close to retirement must not be reduced.
Washington has a moral contract with those who currently
receive Social Security retirement benefits, as well as with those
who are so close to retirement that they have no other options for
building a retirement nest egg. Unfortunately for seniors, the U.S.
Supreme Court has ruled that they have no legal right to their
benefits. This must be corrected. Any real reform plan must
guarantee in law that seniors will receive every cent that the
government has promised them, including an
accurate annual cost-of-living increase .
As a first step in saving Social Security
for future generations, Congress should make sure that every
already retired American has 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.
-
The rate of return on a worker's Social
Security taxes must be improved.
Today's workers receive very poor returns on their Social Security
payroll taxes. For example, an average two-earner couple in their
early 30s will receive about 1.23 percent on their retirement taxes
from Social Security. This is far less than the 3.40 percent (after
inflation) that is paid on Series I U.S. Savings Bonds. As a
general rule, the younger a worker is, the lower his or her rate of
return will be. Meaningful reform must provide a better retirement
income to future retirees without increasing Social Security taxes.
The best way to do this is to allow workers to divert a portion of
their existing Social Security taxes into a personal retirement
account that could earn significantly more than Social Security
could pay.
-
Personal retirement accounts that are part
of Social Security should be funded by allowing workers to allocate
some of their payroll tax dollars to them. Using only promised
surpluses to fund Social Security reform is not sufficient. If the
government overspends--as it has done routinely in recent
decades--working Americans will lose their chance for a secure
retirement. Instead, Congress should divert a portion of the taxes
that Americans currently pay for Social Security retirement
benefits into personal retirement accounts. It should use the
surplus to cover the short-term transition costs associated with
this reform.
- Americans must be able to use Social
Security to build a nest egg for the future.
A well-designed retirement system includes four elements:
retirement income, stable payments, a safety net, and the ability
to save. Workers should be able to use Social Security to build a
cash nest egg that can be used to increase their retirement income
or to build a better economic future for their families.
Today's Social Security system provides a
stable level of retirement income and protects against catastrophic
losses, but it does not allow workers to accumulate cash savings to
fulfill 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, within the framework of Social Security, a system of
personal retirement accounts that are financed with a portion of
the existing Social Security retirement taxes. The personal
retirement accounts could be called "Social Security Part B," with
the traditional version becoming "Social Security Part A."
-
Personal retirement accounts must
guarantee an adequate minimum income.
Seniors must be able to count on a reasonable and predictable level
of monthly income, regardless of what happens in the investment
markets. Therefore, in reforming the system, Congress should ensure
that every American who chooses to have a personal retirement
account receives a retirement income that is at least equal to what
he or she would receive from the traditional Social Security
program. Moreover, any funds manager who participates in a system
of personal retirement accounts must give seniors a guarantee that
their retirement income will at least be equal to what they gave up
in traditional benefits. A retiree whose personal retirement
account contains enough money to exceed the guaranteed benefit
should be allowed to use the extra amount to increase his monthly
income, take the excess in cash, or leave the money to his
heirs.
- For current workers, participation in the
new accounts must be voluntary.
No one should be forced into a system of personal retirement
accounts. Instead, current workers must be allowed to choose
between today's Social Security and one that offers personal
retirement accounts. Americans who choose to divert part of their
payroll tax into a personal retirement account should give up part
of their traditional Social Security benefits in return for the
higher earnings of a personal account. One way to accomplish this
would be to require these workers to give up a portion that is at
least equal to the amount of tax diverted. Thus, if a worker had 20
percent of his Social Security retirement taxes diverted into a
personal retirement account, his government-paid Social Security
check would be reduced by at least 20 percent. The difference would
come from his personal retirement account.
Real
Social Security reform should not only protect current retirees'
benefits, but also provide higher retirement income for working
Americans, regardless of whether Washington faces deficits or
surpluses. The only effective way to ensure that Social Security
can provide 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.