March 26, 2004

March 26, 2004 | News Releases on Social Security

Private Accounts No More Costly Than Other SS Reform Plans

WASHINGTON, MARCH 26, 2004 - No serious policy observer or lawmaker continues to question that Social Security must undergo major reform if it is to maintain the level of benefits and security America's seniors have come to expect of it.

The question is how. David John, Social Security expert at The Heritage Foundation, and others support personal retirement accounts - funded by diverting a small portion of workers' payroll taxes away from the Social Security fund and into private accounts.

Supporters of reform acknowledge that the transition to this system carries significant costs. But, as John says in his most recent paper, PRAs within Social Security don't cost any more than plans without them and could spare us significant tax hikes.

"Most summaries and studies examine Social Security reform from the viewpoint of federal budget impact, tax rates and the survivability of the system," he says. "Few consider the impact of reform on the workers it was designed to benefit in the first place. We shouldn't 'save' Social Security for its own sake, but only if it more effectively provides the benefits workers need at a price they can afford."

The baby boomers - who, at 77 million strong, represent the largest population bubble in the history of the country, begin to retire in 2011. In 2018, the program will cease to collect more in tax dollars than it pays out in benefits and will begin to rely on the surpluses it has accumulated since the program began in the 1930s. By 2042, those surpluses will run out, and the system will have to either lower benefits or increase revenues by 27 percent to remain in balance. And it will have to do this instantaneously.

Several proposals have emerged to repair Social Security or at least set it on the right path. Most call for some form of PRAs -which allow workers to not only almost certainly reap more in dividends but also to have assets they can bequeath. That said, all plans now on the table share two characteristics - they are complex and they are expensive.

"Politicians take advantage of the fact that most Americans have only a vague idea of how Social Security works and how we finance it," says John, a nationally known Social Security expert. "Anyone who tells you it can be done simply or inexpensively either doesn't understand or isn't being honest."

John's paper analyzes plans from Rep. Jim DeMint, R-S.C., Sen. Lindsay Graham, R-S.C., Rep. Nick Smith, R-Mich., Peter Ferrara, director of the International Center for Law and Economics, and one from Peter Orszag, senior fellow at the Brookings Institution, and Peter Diamond, a professor of economics at MIT.

DeMint's plan calls for voluntary personal retirement accounts with the amount that goes into each workers' account varying according to income. Lower-paid workers could move a higher percentage of their contribution into their accounts than higher-paid workers. If the amount a senior would receive from the PRA is lower than the promised benefit would be for those without PRAs, the government would make up the difference.

To pay these costs, government would require that 35 percent of PRA assets be invested in government bonds designated for Social Security. The Social Security Administration rated DeMint's plan and declared it would meet its obligations "through 2077 and beyond."

Graham's plan offers three options - one that includes PRAs and reduces Social Security benefits by changing the formulas by which they are calculated, one that doesn't include PRAs, and one that maintains current benefits but calls for workers to pay more in payroll taxes to offset the shortfalls. SSA says all three would work.

Smith's plan, says John, includes voluntary PRAs and reduces Social Security benefits by the value of the PRAs plus a given interest rate. It also would limit the benefit to a flat $550 in 2004 dollars, insist that newly hired state and local workers be covered by Social Security and gradually increase the retirement age.

SSA says this plan would eliminate the long-range Old-Age, Survivors and Disability Insurance deficit - 1.92 percent of taxable payroll under current law.

Ferrara's plan includes voluntary PRAs, allows lower-income workers to save a higher proportion of their salaries and guarantees their PRA benefits plus their government-paid benefits would equal the benefits promised under the current system. This plan calls for $1.4 trillion in "off-budget" bonds be issued to achieve solvency. SSA says it would meet its obligations through 2077 and beyond.

Finally, the Orszag-Diamond plan includes no PRAs. Instead, it relies on gradually reducing benefits for moderate- and upper-income workers, increasing the retirement age and increasing the payroll tax. SSA says it would "restore solvency to the OASDI program."

About the Author

Related Issues: Social Security