September 30, 2004
By David C. John
Arguments against Social Security personal retirement accounts (PRAs) rest on a
great deal of incorrect and misleading information. These
myths have spread and taken on a life of their own, despite the
absence of any factual foundation.
These myths appear
valid because they either sound logical or contain phrases that
mean one thing in the context of Social Security but something
quite different outside of it. Many have spread because workers
lack sufficient information both about the way Social Security
actually operates and the proposal to use PRAs to reform the
system. Other myths have been purposefully initiated to
promote a political agenda rather than to advance debate in pursuit
of workable reform.
Looking at the actual
facts behind the common misconceptions about Social Security and
PRAs shows that these myths are either incorrect or irrelevant
to the debate about Social Security's future and ensuring
retirement security for future generations.
Myth #1: We cannot afford to reform Social
Security. Establishing a PRA system would cost between $1 trillion
and $2 trillion-far more than just continuing the current
This myth argues that
the "transition costs" for establishing a PRA system would be huge
and that the money that would go into those accounts would be
unavailable to pay benefits to current retirees. PRA opponents say
that the surpluses in the current system are used to build the
Old-Age and Survivors Insurance (OASI) trust fund and that,
if this money were instead placed in PRAs, the trust fund would run
out of money sooner.
Fact: In the long run,
establishing PRAs would cost about $20 trillion less than funding
the current Social Security system.
Ignoring the costs of
the current system is disingenuous. Under any circumstances,
keeping Social Security solvent will require a great deal more
money than it is currently receiving. This additional money is
necessary to reduce the difference between what Social Security
will owe and what it will be able to pay.
Although the exact
amount that will be needed to establish a PRA system in the first
10 years will depend upon the specific plan that is adopted, the
Social Security Administration estimates that the amount needed
will be closer to $500 billion than the $1 trillion or $2 trillion
figures that are often cited. If Congress retains the current
system, Social Security will need almost $27 trillion (in
inflation-adjusted 2004 dollars) in additional funding over the
next 75 years. If Congress acts quickly to establish PRAs,
these costs could be as low as $7 trillion to $8 trillion-about
one-third of the cost of doing nothing. A PRA system could save our
children and grandchildren up to $20 trillion. This is literally a
case where spending billions will save trillions.
The Social Security
system will require additional money under any circumstances.
The only questions are when additional funds will be needed and in
what amounts. Starting in 2018, Social Security will begin to spend
more each year than it receives. From then on, it will need
billions of dollars of general revenue money to pay promised
benefits. There is a "trust fund," but it contains only what
are essentially IOUs that must be repaid out of general
the funds for moving to a PRA system would come from the same
source as the money that would be necessary to repay the Social
Security trust fund. The two main sources of such funds would be
general (non-Social Security) revenues and loans in the form of
government bonds. The only issues that must be determined are the
time at which payments should start and whether the trillions of
dollars involved will be used reform the system or simply delay its
Paying for the current
system or a reform plan will require Congress to balance Social
Security's needs against those of the rest of the economy. In
general, as more additional dollars are needed for the current
system or a reform plan, less money will be available for other
government programs and the private sector.
As this persistent
burden on the general federal budget increases, Congress will find
it increasingly difficult to get the money for Social Security,
making it increasingly unlikely that promised benefits will be
paid on schedule.
Myth #2: The Social Security trust fund
contains assets that make Social Security secure for the next
This myth argues that
the system has enough assets to pay full benefits through at least
2042. This estimate is based on combining Social Security's
projected receipts from its payroll tax and other revenue sources
with the amount of the bonds that will be in the trust
Fact: The Social
Security "trust fund" is essentially a bookkeeping system through
which the government lends money to itself.
There is no pool of
actual assets that is being reserved to pay the benefits of future
retirees. The Social Security trust fund contains nothing more than
IOUs (in the form of special issue U.S. Treasury bonds), which
the federal government can repay only though higher taxes, massive
borrowing, or massive cuts in other federal programs. While many
workers thought that the system's annual surpluses were being
used to build up a reserve for baby boomers, the federal government
has been spending this money to fund other government programs and
to reduce the government debt.
According to the Social
Security Administration, in less than 5 years the size of the
Social Security surplus will begin to drop, and in less than 15
years, Social Security will begin to run a deficit requiring it to
begin cashing the IOUs. Hence, the government will need to find
additional money just to repay the bonds as Social Security cashes
them. Between 2018 and 2042, the government will have to make up
for a total funding deficit of over $5 trillion.
In the private sector,
trust funds are invested in real assets ranging from stocks and
bonds to mortgages and other financial instruments. Assets are
used only for specifically designated purposes, and the fund
managers are held accountable if the money is mismanaged. Funds are
managed in order to maximize earnings within a predetermined
risk level. Investments are chosen that will provide cash at set
intervals, allowing the private trust fund to pay its
The Social Security
trust funds are very different. As a report from the federal
Office of Management and Budget (OMB) during the Clinton
The Federal budget
meaning of the term "trust" differs significantly from the private
sector usage.... [T]he Federal Government owns the assets and
earnings of most Federal trust funds, and it can unilaterally raise
or lower future trust fund collections and payments or change the
purpose for which the collections are used.
Security trust funds are "invested" exclusively in a special type
of Treasury bond that can only be issued to and redeemed by the
Social Security Administration. According to a Congressional
Research Service report,
According to OMB, this
situation allows funds to appear on the books while in reality they
In short, the Social
Security trust funds are only an accounting mechanism. They show
how much the government has borrowed from Social Security, but
do not provide any way to finance future benefits.
Thus, while Social
Security has enough paper assets to finance benefits until 2042,
the reality is quite different. Social Security will have enough
cash to pay benefits only until 2018. After that, the program
will have to rely on ever-growing amounts of additional tax dollars
to pay promised benefits.
Myth #3: The Social Security system can be fixed
by implementing modest changes, including raising the
retirement age, making the wealthy pay Social Security taxes on all
of their income, or creating faster economic growth.
Those who spread this
myth say that the program's average annual cash flow deficit
(after repaying the trust fund) is 1.89 percent of taxable income-a
relatively small gap that could be closed through modest changes in
the current system.
Fact: According to the
Social Security Administration, the current system will require a
total of $27 trillion (in constant 2004 dollars) more revenue than
it will receive in taxes over the next 75 years.
For example, one
proposed "modest" step would be to raise Social Security taxes by
an additional 2 percent of a worker's income. This number was
derived by calculating the mathematical average of the
additional funds that the Social Security system will need over the
next 75 years. However, raising Social Security taxes by 2 percent
of income only delays the deficits for about six years-it does not
end them. The problem is that this approach does not allow for the
fact that Social Security will not need the same amount each year.
In the short run, the program will collect more money than it
needs, but once annual deficits start in 2018, they will grow ever
larger. Increasing Social Security's revenues by the same amount
each year would initially provide much more money than it can use,
and then, not nearly enough. By 2050, the program would be running
an annual deficit of $280 billion, which would rise to $640 billion
per year by 2075.
reform is to make higher-income workers pay Social Security taxes
on their entire income (rather than on just the first $87,900 they
earn). However, this relatively substantial increase on
targeted workers' tax burden would only delay Social Security's
annual deficits by approximately six years. More money would
initially come into Social Security's coffers, but the program
would ultimately pay greater benefits to retirees who had higher
incomes. Although the government could collect higher taxes from
certain citizens without offering higher benefits, such a move
would be the first step in transforming Social Security into a
Moreover, such a tax
increase would seriously harm the nation's economy. While those who
support this tax increase may envision it as a tax on the rich, it
would also affect millions of middle-income families. Combined
with federal and state income taxes, it would raise their overall
taxes to 50 percent-or even 60 percent-of income, discouraging
People from working, saving, and investing. To make matters
worse, such an increase in taxation would affect entrepreneurs
and business owners, resulting in job losses as businesses
downsized to make up for the greater tax burden.
Calculations by the
Social Security Administration likewise show that faster
economic growth would not be enough to fix the deficit problem.
Even with a growth rate that far exceeds historic levels, the
system would still begin to experience massive deficits within a
few years. Higher economic growth-and the resulting higher
wages- would allow the program to receive more money in the short
run, but it is also correlated with greater benefits for
Myth #3a: If Congress would stop spending the
Social Security surplus and repay the money that it has already
spent, Social Security would not need to be fixed.
This corollary to Myth
#3 recognizes that the federal government takes excess Social
Security taxes and spends them to meet its bills. In return, the
Social Security trust funds get only special issue Treasury bonds
(i.e., IOUs) that will be repaid later. Those who believe this
corollary say that if Social Security's excess taxes were really
invested, the program would have enough money to pay full benefits
well past 2042.
Fact: Even if it were
possible for the federal government to invest the Social Security
trust funds, repaying the borrowed money would only delay-not
solve-Social Security's financial problems.
Repaying the trust fund
could delay Social Security's cash crunch, but it would not
eliminate it. According to the Social Security
Administration's own estimates, even with real money in the
trust fund, the program will begin to run deficits in 2042 and will
continue to run deficits as far into the future as the agency's
forecasting tools can predict.
calculations assume that the trust fund receives the same interest
as other federal bonds. Even though the trust fund consists of
only promises to repay the money, those bonds are still credited
with the same interest rate that other bonds of the same maturity
length issued on the same day would receive. The interest is
"paid" by issuing the trust fund still more bonds.
If the government could
invest Social Security money in stocks, the deficits predicted for
2042 could be further delayed. However, allowing the government to
invest the Social Security trust funds could create serious
conflicts of interest. For instance, if such investing had been
allowed in the past, the U.S. government could have been the
largest stockholder in Microsoft at the same time that it was suing
the company for antitrust violations. It could also have been
the largest stockholder in both WorldCom and Enron at the time
of those firms' demise.
Myth #4: Introducing Social Security personal
retirement accounts would result in reduced benefits for existing
retirees and those close to retirement.
Opponents of PRAs say
that if a portion of the Social Security payroll taxes is diverted
to personal retirement accounts, there will not be enough money
left to pay the full benefits promised to existing retirees and
those close to retirement. They further claim that as Social
Security's obligations increase in the future with the
retirement of millions of baby boomers, benefits would need be cut
Fact: For now, Social
Security is collecting more than enough money both to pay full
benefits to current retirees and those about to retire and to
fund PRAs. When extra money is needed for these accounts, it can be
found through the same method that is used today to finance Social
Establishing PRAs would
not require benefit reductions for either current retirees or those
close to retirement. This argument against PRAs assumes that Social
Security is a closed system with money coming only from Social
Security taxes. This is not true today and will not be the case in
The OASI trust fund
pays retirement and survivors' benefits. In 2003, the OASI
trust fund had a total income of $543.8 billion: $456.1 billion
(83.9 percent) from payroll taxes; $12.5 billion (2.3 percent) from
income taxes paid by higher-income retirees on their Social
Security benefits; and $75.2 billion (13.8 percent) from interest
paid on the trust fund. Both the income tax and the interest
payments that the OASI trust fund received in 2003 came from
general (non-Social Security) tax revenues, such as federal
personal and corporate income taxes and federal excise taxes. In
short, today's Social Security is not a closed system that
relies exclusively on its payroll tax for money and there is no
reason to assume that establishing a system with personal accounts
should be financed exclusively through payroll taxes.
During 2003, the trust
fund paid out $399.8 billion in benefits (73.5 percent of the taxes
it collected) and $2.6 billion for administrative expenses
(0.5 percent of all the taxes it collected). The remaining $137.8
billion (25.3 percent of tax income) was retained as special issue
Treasury bonds in the trust fund. Today's Social Security receives
more money than it pays out in benefits. That money could be used
to pay for some of the cost of establishing PRAs.
The sad fact is that
regardless of whether or not PRAs are established, Social Security
will require hundreds of billions of dollars of additional money.
The only questions are when Social Security will require
additional general revenues and in what amounts. Under the current
system without PRAs, Social Security will begin to require large
amounts of additional general revenues in 2018, when the system
begins to pay out more in benefits than it takes in each year
According to the Social
Security Administration, the current program will need $15 billion
(in 2004 dollars) in general revenue money in 2018. That amount
will grow to $101 billion by 2022, $203 billion by 2027, and will
continue to grow each year until the last paper bond in the trust
fund is cashed in 2042. In total, the federal government will need
over $5 trillion between 2018 and 2042 just to repay the trust
If PRAs are
established, it is true that the money that goes into them will not
be available for benefit payments. Initially, these accounts can be
funded from the excess revenues that Social Security collects
each year. After that, the additional money needed to pay Social
Security benefits would come from general revenues just as it will
if Social Security is not fixed.
A key fact to remember
is that while doing nothing will require $27 trillion in additional
general revenue money, a reformed Social Security system using
PRAs will cost only $7 trillion to $8 trillion. One reason for the
lower cost of PRAs is that payroll taxes diverted to PRAs will not
be lost. The money will be available to help pay for younger
workers' retirement benefits.
Myth #5: Repealing the Bush tax cuts would save
Opponents of PRAs also
charge that the Social Security surplus has gone to wealthy
Americans as a result of the Bush tax cuts. They further claim that
repealing some of these tax cuts would make Social Security
financially healthy for many years.
Fact: The Bush tax cuts
do not directly affect Social Security's finances. They did not
reduce Social Security's cash flow, and repealing all or part of
the tax cuts will not improve Social Security's financial
There are three reasons
why neither the Bush tax cuts nor their repeal will affect Social
First, while the Bush
tax cuts made major changes to the income tax system, they made no
changes to the Social Security payroll tax system, which provides
most of Social Security's revenue. Social Security payroll tax
collections were the same in 2003 as they would have been if the
tax cuts had never passed. The tax cuts' only effect on Social
Security's tax revenues was to increase collections from
People who filled the new jobs created by the tax
Second, passage of the
Bush tax cuts did not affect the Social Security surplus in any
way. As noted above, there is no actual money in the Social
Security trust funds, only special-issue government bonds.
This has been the case since the trust funds were first created.
The Treasury collects all payroll taxes on behalf of Social
Security and pays all of its benefits. Any surplus left over after
paying the Social Security benefits remains with the Treasury,
while the trust funds get bonds, which are essentially IOUs. The
government then spends the money on whatever it needs to buy, from
aircraft carriers to health care services. This has been true under
every President since President Franklin D. Roosevelt and remains
true under President George W. Bush.
Third, even if the tax
cuts were repealed and every dollar of additional revenue was given
to Social Security, under current law the system would be no better
off. Because Social Security has no legal way to stockpile or
invest extra money, the extra cash would remain with the Treasury,
and Social Security would simply receive more special issue
Treasury bonds. While this would inflate the size of the trust
fund, those bonds would still need to be repaid, just like the
existing ones, using federal tax dollars. Social Security
would still need $56 billion in additional tax money in 2020, $163
in 2025, and so forth-just as it will with the tax cuts in place.
That additional money would still come out of pockets of future
taxpayers, just as it must under current law.
Myth #6: Personal retirement accounts would incur
high administrative costs that would eliminate any potential
benefits, and the only People who would gain would be the wealthy
and Wall Street.
Some critics of PRAs
argue that workers would incur high administrative fees if private
funds managers administer the PRA assets. They claim that these
fees would be so high that they would consume a major portion of
the money in PRAs.
Fact: Developing a
simple personal retirement account system with very low
administrative costs would be simple.
State Street Trust, one
of the largest managers of retirement savings, has estimated that
administering a personal retirement account would cost from $3.55
to $6.91 per person annually, based on proprietary data that
the bank accumulated from its experience in managing a host of
pension plans. In terms of the percentage of
assets under management, the annual fee would be only 0.19
percent to 0.35 percent. This fee assumes an annual
contribution per worker equal to 2 percent of his or her gross
earnings. The cost would drop significantly if that contribution
increased to an amount equal to 4 percent of earnings or higher.
State Street Trust's findings were reviewed and accepted by the
Government Accountability Office as
This low level of
administrative fees would certainly not reduce the benefits of
a PRA. In addition, history shows that administrative costs
are highest when a system is first implemented and start-up costs
must be covered. As time passes, administrative costs decline
significantly. This has been true for 401(k) accounts, the Thrift
Savings Plan (TSP) for federal employees, and even Social Security.
For example, the administrative costs of 401(k) plans have
decreased over time, despite the plans offering an increasing
number of investment options and a higher level of personal
service. Although the costs of specific plans vary according to
each plan's complexity, size, and the types of investments, many
large companies have been able to keep their administrative costs
as low as 0.3 percent by offering only a limited number of
The federal Thrift
Savings Plan, a privately managed retirement plan open only to
federal employees, has experienced a dramatic 76 percent
reduction in administrative costs since the system started in 1988.
Today, participants pay annual administrative fees that are below
0.1 percent of assets under management. TSP's extremely low
administrative costs are significant, given that many experts
expect that a PRA system would closely resemble the structure and
investment choices found under TSP.
The Social Security
system experienced similar reductions in administrative costs
during its formative years. In 1940, when the system first
began to pay benefits, its administrative costs equaled 74 percent
of all Old-Age and Survivors Insurance benefits paid. In 1945, this
figure had declined to 9.8 percent. Today, administrative costs
make up only 0.5 percent of payments from the OASI trust fund. Even
though this is not a perfect comparison with the other two
examples, given that Social Security's structure has changed over
the years, it does suggest that fees could be very low.
Myth #7: Unlike stock market investments, today's
Social Security is guaranteed and risk-free.
This myth rests on the
belief that there is no investment risk under today's Social
Security system because an individual's benefits are paid
entirely out of taxes. Those who support this myth point out that
Social Security is an entitlement that does not require
congressional appropriations and that benefits are automatically
paid out to anyone who meets the legal qualifications.
Fact: The current
Social Security system is not risk-free: Future generations may be
unwilling to pay the sharply rising costs of the current Social
While there is no
immediate investment risk associated with Social Security, its
future survival will depend on the willingness of future taxpayers
to spend the massive additional sums needed to pay the promised
benefits. If Congress does not reform the system, annual cash flow
deficits are predicted to begin in 2018, with the deficits quickly
ballooning to alarming proportions. After adjusting for inflation,
annual deficits will exceed $100 billion by 2022, $200 billion by
2027, and $300 billion by 2034.
These annual deficits
will necessitate pumping massive additional sums of tax money into
Social Security. Paying full promised benefits will require some
combination of much higher taxes, borrowing large amounts of money,
or sharp reductions in other federal programs. Future
generations could face a choice between paying grandma her
full Social Security benefits and cutting her grandchildren's
health and education programs.
Social Security taxes
would need to increase by nearly 50 percent during the coming
decades to pay future retirees their full promised benefits. If
taxes were not raised, Social Security benefits would need to be
reduced by as much as 35 percent by 2079. No matter which option
Congress chooses, younger workers will end up paying much more for
potentially lower benefits. Those younger workers would be
much better off with PRAs.
No one doubts that
future generations will want to pay retirees the full amount of the
retirement benefits that they have been promised. However, if
Social Security is not reformed, the question remains whether or
not those younger workers will be willing to make the necessary
sacrifices to do so. This means that future retirees' Social
Security benefits are at risk.
Myth #8: Recent volatility in the stock
market proves how dangerous PRAs would be.
Opponents point out
that the stock market declined by approximately 12 percent during
the second quarter of 2002 alone. During the stock market losses
from 2000 to 2002, PRAs would have lost much of their value and
would be unable to provide adequate Social Security benefits to
Fact: PRAs would be
invested in more than just stocks. Furthermore, because retirement
investing would take place over decades, not just a few years,
longer-term gains will more than make up for periods of stock
Studies that purport to
show that either PRAs or the Social Security trust fund would have
lost money over the past few years if they had been invested in
stock assume that 100 percent of the trust fund would have been
invested in stocks, rather than a diversified portfolio that would
have balanced stock losses with gains on bonds or other
investments. They also focus on only the short-term market trends,
ignoring the gains that would result from longer-term
Morningstar, Inc., an
independent market data and analysis firm, estimates that the value
of mutual funds invested in diversified U.S. stocks declined 12.1
percent during the second quarter of 2002. However, not all types
of investments went down. Mutual funds containing lower-risk
instruments such as taxable bonds (which are routinely held by
those nearing retirement) rose an average of 1.4 percent over that
same period, while funds invested in tax-exempt bonds rose 3.2
percent. Thus, in one of the worst quarters for stock
investment, PRAs invested in a diversified portfolio would
Over the long run, all
of these investments did even better. Over a five-year period
including the second quarter of 2002, mutual funds invested in
stocks earned an average of 3.9 percent per year, while mutual
funds invested in taxable bonds and tax-exempt bonds earned an
average of 5.0 percent a year.
PRAs should not be
invested solely in stocks. They should instead be invested in a
diversified portfolio of stock index funds and different types of
bond index funds. The default investment for PRAs should be a
lifestyle fund that automatically reduces the proportion of stocks
as the worker gets older, thus locking in past gains and sharply
reducing the chance of major losses in the years approaching
Myth #9: Lower-income and minority workers
are better off with the current Social Security system. The
rate of return is not a primary concern because Social Security is
essentially an insurance program.
People who believe this
myth argue that the existing Social Security system pays
proportionately higher benefits to lower-income workers than
it does to higher-income workers and that minority workers
likewise receive proportionately more from Social Security's
disability program than non-minority workers. They stress that
Social Security was intended to be an insurance program and that,
like holders of car insurance, Social Security enrollees should not
feel cheated if they do not collect on their investment: It should
be enough for them to know that funds will be available if
retirement accounts would allow lower-income and minority workers
to earn more on their Social Security investments and could create
assets that could be passed on to their families.
Security is structured to pay higher benefits to workers with lower
incomes, virtually all low-income males are more likely to pay more
into the system than they will ever receive in benefits, even under
the most favorable assumptions. To receive a favorable rate of
return on Social Security payments, a worker must live long enough
to receive more in benefits than he or she paid in taxes.
Statistics show that lower-income workers have a much shorter
average lifespan than upper-income workers. Therefore, although
they receive higher benefits relative to their incomes, they
receive them for a much shorter length of time.
Making matters worse,
the current Social Security system does not allow these
workers to create any sort of nest egg that could be left to their
families in the event of an early death. Instead, today's
system pays low benefits to limited categories of survivors. In
contrast, a PRA system would allow workers to create a nest egg
that could be left to their families or even to organizations such
Just about every male
currently under the age of 38 will actually lose money under the
current Social Security system. For example, the average single
male in his mid-20s earning $13,000 per year would receive
approximately 88 cents in retirement benefits for every dollar that
he paid in Social Security taxes-a lifetime loss of about $13,400.
If such an individual had been allowed to invest the Social
Security retirement taxes that he and his employer paid in a
portfolio comprised of 50 percent government bonds and 50 percent
stock equity funds, he would have earned $145,000 on his investment
On average, a
21-year-old African-American single mother earning approximately
$20,000 per year (the current average income for African- American
females) can expect to receive a rate of return from Social
Security of only 1.2 percent. If the amount that she and her
employer paid in Social Security taxes had instead been invested in
U.S. government bonds, she would have received a return of
approximately 3 percent ($93,000 more than from Social Security) to
fund her retirement. If the money she paid in Social Security taxes
had been invested in a portfolio composed of 50 percent
government bonds and 50 percent stock index funds, she would have
earned nearly $383,000 (before taxes) for retirement ($192,000 more
than from Social Security).
Because of their
shorter life expectancies, lower-income Americans are hit
especially hard by the inability to include their lifetime Social
Security investments in their estates. Except in situations in
which a worker leaves behind young children or a spouse who has
lower benefits, the payroll taxes of low-income workers will
permanently leave their families and their communities at the time
of their deaths-and will instead benefit others with longer life
With regard to
disability benefits, it is true that African-Americans and other
minority groups do receive proportionately greater benefits than
non-minority workers. However, Social Security's disability
program is a separate program that is financed with its own tax and
trust fund. The fact that minority workers do better under Social
Security's disability program does not compensate for their
poor returns under Social Security's larger retirement
Security should not be considered simply as an insurance
program any more than workers would view their 401(k) plans as
insurance. Workers should view Social Security as they would any
other retirement plan and see it as a way to provide income for
retirement. The Social Security system should be measured against
other retirement plans to measure its ability to function as a
cost-effective source of retirement income.
Myth #10: Introducing PRAs would reduce Social
Security's disability benefits.
Currently, both Social
Security's retirement program and its disability program use the
same benefit formula to determine a worker's monthly payment.
Establishing PRAs would require changing the benefit formula to
reflect the portion of retirement benefits that would be paid
from the accounts. Those who oppose PRAs claim that any changes to
the current formula would necessarily lower disability benefits.
They also say that the PRAs of disabled workers (who tend to be
much younger than retirees when they are disabled) would not have
enough money in them to make up for lower government-paid
Fact: PRAs could easily
be designed to avoid changing disability benefits.
The solution is simple:
create two benefit formulas. Opponents are correct that
changing current government-paid benefit formula without
retaining the existing formula for disability benefits could
reduce disability payments. However, Congress could simply change
the law to require the Social Security Administration to use the
existing formula to calculate disability benefits and a new formula
to calculate retirement benefits. That would leave disability
benefits unaffected by any change in the formula for
deserve a more informative, less partisan debate about Social
Security reform. While the current system may be able to pay all
the benefits that it has promised today's older workers and those
who have already retired, it cannot do so for younger
There are only three
ways to avoid the impending Social Security crisis: (1) raise
taxes and borrow massive amounts of money, or make massive
cuts in other federal programs; (2) reduce benefits promised to
younger workers; or (3) make payroll taxes work harder and bring
greater returns by allowing workers to invest all (or a part) of
them through PRAs. While the first two options would make Social
Security returns even lower than they are today, PRAs would not
only address the impending insolvency of the system, but also
improve retirement incomes and help to close the gap between what
the current system has promised and what it will be able to
pay. It would also allow workers of all income levels to build a
nest egg for the future. Simply put, PRAs can give workers a much
more secure retirement income than the current Social Security
The debate regarding
Social Security reform is not an academic exercise, nor should it
be used as a political ploy. The outcome of this debate will
determine whether or not younger workers and their children will be
able to receive retirement benefits that are comparable to those
enjoyed by their parents.
The various myths and
scare tactics that have emerged in the course of this debate do not
alter the unpleasant realities that will confront American
workers if nothing is done. Every day that Congress and the
President delay taking action makes it more likely that our
children and grandchildren will face the cost of crippling
deficits. It is time to put aside the myths that have been
stumbling blocks in a quest for authentic, effective, and
critically needed Social Security reform.
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Looking at the actual facts about Social Security and personalretirement accounts (PRAs) shows that the arguments against PRAsare either incorrect or irrelevant to the debate about SocialSecurity's future. Every day that Congress and the President delaytaking action on this issue makes it more likely that our childrenand grandchildren will face the cost of crippling deficits.
David C. John
Senior Research Fellow in Retirement Security and Financial Institutions
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