Commentary

Take Advantage of Private Accounts’ High Return Rate

Social Security is the largest government program in the world, accounting for 23 percent of the federal budget. The Social Security tax is the largest tax the average family pays. Nearly 80 percent of Americans pay more in Social Security taxes than they do in federal income tax. Millions of seniors depend on Social Security for their retirement.

Yet the program is unsustainable. It cannot pay future benefits without drowning our children and grandchildren in a sea of debt and taxes.

Social Security will begin running a deficit by 2017, just nine years from now. Of course, in theory, the Social Security trust fund will pay benefits until 2041. But even that figure is misleading, because the trust fund contains no actual assets. The government bonds it holds are simply a form of IOU, a measure of how much money the government owes the system. It says nothing about where the government will get the money to pay back those IOUs.

Even if Congress can find a way to redeem the bonds, the trust fund surplus will be exhausted by 2040. Overall, the amount the system has promised beyond what it can actually pay now totals $15.3 trillion. Setting aside some technical changes in how future obligations are calculated, that’s $550 billion worse than last year.

Moreover, Social Security taxes are already so high, relative to benefits, that Social Security has simply become a bad deal for younger workers, many of whom will end up paying more in taxes than they receive in benefits.

But the single most important problem with the current Social Security system is that workers have no ownership of their benefits. This means they are left totally dependent on the good will of 535 politicians to determine what they’ll receive in retirement. And those benefits are not inheritable.

Of course we could always raise taxes or cut benefits enough to bring the system into balance. But we would have to raise payroll taxes by roughly 50 percent. Some have suggested removing the cap on income subject to the payroll tax. But while that would be the largest tax increase in U.S. history, $1.3 trillion over the first 10 years, it would increase Social Security’s cash-flow solvency by only seven years.

Social Security will begin running a deficit by 2017, just nine years from now.”

Worse, tax increases or benefit cuts would do nothing to address Social Security’s other problems. It would not enable workers to decide how their money is invested. It would not allow low- and middle-income workers to accumulate a nest egg of real, inheritable wealth. It would not improve Social Security’s rate of return for younger workers.

A much better approach would be to take advantage of the higher rate of return from private investment by allowing younger workers the option of saving some of their Social Security taxes through personal accounts.

But no matter what, Social Security reform is not an option, but a necessity. All candidates owe it to us to tell us where they stand.

Michael D. Tanner is a senior fellow at the Cato Institute editor of Social Security and Its Discontents: Perspectives on Choice (Cato Institute, 2004).