However, given the clear advantages of larger
new savings of 68.4 percent of assets invested
through individual accounts.33
accounts, none of those reasons holds up.
First, small account size seems unlikely to
After using the three financing sources dis-
protect supporters from political attack. The
cussed above, we believe that any remaining
recent Medicare reform debate provides a useful
transition could be financed through reductions
in other wasteful government spending.34
example. Despite rollbacks of attempts to intro-
duce market competition to Medicare (the final
Simply restraining the projected growth in non-
bill contained only a handful of "demonstration
defense discretionary spending by 1 percent
would generate more than $20 billion per year.35
projects" that don't begin until 2010), the bill
was still attacked as an attempt to "privatize"
We recognize that it may be necessary to
Medicare. Opponents of individual ownership
issue some new debt to cover short-term year-
can be expected to be just as vociferous in their
to-year cash shortfalls. If that should become
denunciations of 2 percent accounts as they
necessary, we believe that the issuance of such
would be in attacking 6.2 percent accounts.
debt should be honest, explicit, and on budget.
At the same time, small account proposals
At the same time, we should understand that
may prove politically counterproductive by dissi-
this would not really be new debt; it would sim-
pating the enthusiasm of grassroots activists and
ply be making explicit an already existing
others who support reform and failing to engage
implicit debt.
the attention of young workers. Opponents of
It is also important to remember that the
individual accounts are entrenched and well
financing of the transition is a one-time event
organized. Washington politicians are fearful and
that actually serves to reduce the government's
reluctant to take on an issue of this magnitude. It
future liabilities. The transition moves the gov-
will take strong public support to make reform
ernment's need for additional revenue forward
happen.
in time, but--depending on the transition's ulti-
Generating a sufficient level of support, par-
mate design--it does not necessarily increase
ticularly among generally apathetic younger
the amount of spending necessary. In fact, it
voters, will require a reform proposal that
will likely reduce the total cost of Social
makes clear how much those voters have to
Security. In effect, it is a case of pay a little now
gain from reform. Bold colors, not pale pastels,
or pay a lot later.
will be needed to generate that kind of support.
The advantages of larger individual accounts
are not lost on voters. A poll conducted by Zogby
Why 6.2 Percent Accounts?
International for the Cato Institute asked voters
how much of their Social Security taxes they
Some proposals for creating individual
wished to invest. A plurality of voters (27.9 per-
accounts as part of Social Security reform keep
cent) chose the full 12.4 percent. Only a slightly
most of the traditional PAYGO Social Security
smaller group (26.5 percent) chose 6.2 percent-
structure in place and offer only very small
age points, as provided for in this proposal. Only
accounts, allowing workers to privately invest
11 percent of voters preferred 23 percent
just 23 percentage points of payroll taxes.
accounts. Support for large accounts was consis-
People who support plans with small indi-
tent across all political, ideological, and demo-
vidual accounts generally do so for one of three
graphic groups, with younger voters showing
reasons:
Financing the
particular support for bigger accounts36 (Table 1).
transition is a
· A political calculation that small accounts
Second, although risk diversification is gen-
one-time event
erally a good thing, continued reliance on a
will avoid charges of "privatizing" Social
government-provided benefit may actually
Security;
that actually
· A desire to diversify risk by splitting respon-
increase the overall risk to workers. Those
serves to
making this argument generally attach the most
sibility for retirement income between mar-
reduce the
risk to the market-based component of a
kets and government, combining defined-
reformed Social Security system (individual
contribution and defined-benefit programs;
government's
accounts) and less or even no risk to the portion
or
future
· Concern over short-term annual cash
provided by government. In reality, however,
liabilities.
this misreads both market and political risks.
deficits.
10