Commentary

Personal Accounts Needed to Avert Disaster

By Berna Yiğit Brannon
This article appeared on Cato.org on January 27, 2004.

President Bush reiterated his commitment to bringing meaningful reform to our nation’s Social Security system Tuesday night. A renewed push for introducing personal accounts for younger workers, a goal of the president, would ultimately improve Social Security’s viability as well as improve the personal accountability of the system.

Social Security reform is high on the president’s agenda, because he understands the full scope of the Social Security crisis. Over the next 75 years, the program faces $26.4 trillion in unfunded liabilities. This translates into $4.9 trillion that must be invested today in order not to cut benefits or raise payroll taxes to pay for the promised level of benefits.

Social Security’s actuaries report that without reform, Social Security would be paying out more in benefits than it would be collecting in taxes by 2018, and that by 2042 the Social Security trust fund would be exhausted. If we wanted to invest enough money now so that Social Security would be solvent beyond 75 years, that amount would be $11.9 trillion. Further exacerbating the problem is that for each year reform is postponed, the unfunded liabilities keep growing. If no action is taken by the exhaustion date, benefit cuts starting at 27 percent will be necessary.

More important than knowing the dates and figures is understanding the design of the Social Security system that led to this nightmare. The pay-as-you-go nature of Social Security means that payroll taxes collected today are used for paying current retirees’ benefits. This was seen appropriate for a program designed to insure workers in case they lived beyond retirement. When the government first established Social Security, the average worker did not live much beyond the retirement age. In a society with a large population of younger workers, a shared risk pool was not a big burden on workers.

However, times have changed. Americans have been living longer and healthier lives, which is a blessing. At the same time, birth rates have been falling, resulting in fewer workers supporting an increasingly growing group of retirees, and the soon-to-be-retiring baby boomer generation will cause a surge in retirement. As a result, the younger workers of today are supporting today’s retirees and cannot be certain that they will see their promised retirement benefits.

When most workers today can expect to live for a considerable period of time after they retire, the continuation of a program that is not designed for such an occurrence does not seem appropriate. The faltering health of our Social Security system calls for a retirement savings program that has a direct link between contributions and benefits. Today, American society needs a fully funded retirement system. Money saved today should be used for the retirement of those who saved it. Individual accounts accomplish that by giving workers ownership of their savings and equipping them with tools to secure their retirement.

President Bush should be applauded not only for taking a stance on a topic that is guaranteed to generate heated discussions, but also for realizing that throwing money at a system that no longer answers America’s retirement concerns is not the solution. The president has stated that we need a major Social Security reform that involves individual accounts. Now that we have strong leadership, it is time to work on a permanent solution for Social Security.

Berna Brannon is Social Security analyst at The Cato Institute.