The Little Commission That Could

December 10, 2001 • Commentary

Now we know: It can be done.

For years, opponents of Social Security privatization have told us that any proposal to allow workers to privately invest a portion of their Social Security taxes would lead to massive benefit cuts for both today’s and future retirees. The specter of starving senior citizens became a standard part of some political campaigns.

But, now, the President’s Commission to Strengthen Social Security has produced three illustrative plans that give workers control over a part of their Social Security taxes. There are no cuts in benefits for current retirees or anyone close to retiring under any of these proposals. Perhaps even more impressive, under every one of the plans, younger workers who choose to invest privately, would receive higher total benefits than today’s system promises. That’s right — not benefit cuts, benefit increases. And, two of the plans go even farther and make additional benefit increases for low‐​wage workers.

The simplest plan would allow workers to put two percentage points out of their 12.4 percent payroll tax into a private account. That account would be their property. They would own it, unlike the current Social Security system that gives workers no ownership or legal right to their benefits. The workers would forgo a small portion of the benefits they are scheduled to receive under the current system. But if the investment in their accounts earned an average annual return of just 3.5 percent, workers would receive more at retirement than they are promised by Social Security, and far more than Social Security can actually pay. The commission’s discussions made it clear, as well, that while this plan was modeled for a 2‐​percentage point account, the structure would allow for much larger accounts in the future. Under this plan, workers who do not choose to privately invest would still be guaranteed all promised benefits. While this plan moves Social Security, as a whole, closer to solvency, it does not solve all the program’s problems.

The second option would allow workers to privately invest four percentage points of their payroll taxes. At the same time, the future growth of traditional Social Security benefits would be slowed by adjusting the benefit formula to take into account inflation rather than wage growth. This step, long recommended by economists, would restore the system to long‐​term solvency, while ensuring that future beneficiaries still received the same relative benefits as today’s retirees. And, if workers choose to invest privately and earned just a 2 percent annual return, they would receive higher benefits than they would under the current system.

The final option is more complex and less satisfying. Workers would have the option of contributing one percent of their pay, over and above the payroll tax, to an individual account. If they choose to do so, they can divert an additional two and a half percentage points out of their payroll taxes to the account. There are a variety of adjustments to the current system’s benefit structure to bring it into long‐​term balance, and the option raises the possibility of adding new tax revenue to the system. Even so, workers who choose the private investment option would receive higher benefits at retirement.

Moreover, under all three of these plans workers, especially low‐​income and minority workers, would have the opportunity to accumulate real wealth. For the first time, low‐​wage workers would have the same opportunity to save and invest as wealthier Americans. Equally important, that wealth would be inheritable, a legacy for their children and grandchildren.

Could the commission have gone farther? Certainly. If giving workers ownership and control over part of their Social Security taxes is good, giving them control over more of their money is better. But given the political constraints of today’s Washington, it is remarkable that such a broad‐​based, bipartisan group has been able to agree on the benefits of individually owned, privately invested accounts.

In the next few weeks the commission will finalize and issue its report. They then call for a year of citizen education and debate. President Bush remains committed to action on this important piece of his agenda, probably in 2003. The commission has gotten things off to a good start.

At the very least, they’ve put an end to the Big Lie of privatization foes. Individual accounts do not mean benefit cuts.

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