November 19, 2002

November 19, 2002 | News Releases on Social Security

Debate Over Social Security Reform

WASHINGTON, NOV. 19, 2002-The long-term economic health of Social Security is much worse than many who oppose personal retirement accounts are willing to admit, says an expert from The Heritage Foundation.

"Opponents make it sound as if the system just needs a few fixes, and then everything will be all right," says Heritage Research Fellow David John, author of a new report that exposes what he calls the "top 10 myths" about Social Security reform. "But with fewer and fewer workers available to support more and more retirees, eventually only two options will be left to those who reject personal accounts: raise taxes or cut benefits."

Neither option offers a long-term solution, according to John. "Take the proposal to raise Social Security taxes by 2 percent of current tax income," he says. "At best, it would buy us just a few years' time. We'd go from running surpluses to running deficits-a shortfall of $163 billion a year by 2050 and $365 billion a year by 2077."

One common charge, John says, is that setting up a system of personal retirement accounts will be prohibitively expensive, with estimates for the transition costs ranging from $1 trillion to $1.3 trillion in the first 10 years alone. But keeping the current system is going to take additional money, no matter what, he says. The only question is how much.

Under the current system, we're going to need $6 trillion just to make sure the Social Security trust fund can pay benefits through 2041, and an extra $19 billion to get us all the way through 2077, he says. That's a total of $25 trillion. But Social Security's own actuaries have shown that it would take only $7 trillion to fix the system permanently.

Another persistent criticism is that high administrative costs will make personal retirement accounts unaffordable to low- and middle-income Americans. Not true, John says: State Street Trust, one of the largest managers of retirement savings, estimates it would cost no more than $7 a year to manage the accounts (in a study reviewed and accepted by the U.S. General Accounting Office). And since administrative costs tend to be highest when a system is first implemented, even that low cost likely would drop over time, John says.

Then there's the accusation that the recent stock-market losses prove how dangerous personal accounts can be. But these losses could hurt the accounts only if the money they house were invested in short-term or high-risk funds-which certainly wouldn't be the case, he says. "Retirement investing takes place over a period of decades, not a few years," the Heritage expert says. "You can look back 200 years and find that, even accounting for every recession and the Great Depression, stocks earn an average of 7 percent annually."

Compare that, he says, to the 1 percent to 2 percent "rate of return" Social Security will pay most of today's young workers. "Even after recent market losses, a personal account invested in stocks throughout the past 40 years would pay almost three times more in benefits than today's Social Security does," he says.

The report can be found online at www.heritage.org/Research/SocialSecurity/ bg1613.cfm.

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