Opponents of personal retirement accounts say they would make Social Security less social and less secure. In this election year, barely a day passes in Washington without some new accusation designed to scare seniors about personal accounts.
In truth, voluntary personal‐account plans such as those from the president’s bipartisan reform commission strengthen Social Security’s finances while letting all workers, rich and poor alike, build wealth throughout their lifetimes and pass it on to their heirs. If account opponents have a better proposal to maintain Social Security for the future, they should put it forward. Their silence regarding their own plans speaks volumes.
Social Security today is running surpluses, but as the population ages those surpluses soon will turn to deficits. Increased life expectancies and low birth rates mean more retirees to support and fewer new workers to support them. Over the long term, the cost of paying benefits will almost double as a share of workers’ wages. By 2017 Social Security will be paying out more in benefits than it collects in payroll taxes. At that point, Social Security must begin redeeming the government bonds held in its trust fund. But, as a Congressional Budget Office official pointed out on May 22, the trust fund’s solvency is only on paper — it is nothing more than an accounting device, not a store of wealth.
Barry Anderson, C.B.O. deputy director, said: “Even calling it a trust fund can be misleading and confusing to retirees, members of Congress and the media alike. The trust fund holds not money but IOUs from the government to itself. No matter how healthy the trust fund is claimed to be, the economy must generate the cash needed to pay these IOUs to fund claims to eligible beneficiaries. The only date that really is important is the date when payments to beneficiaries exceed taxes levied to cover them.”
That does not mean we will not repay the trust fund’s bonds — all proposals from the President’s Commission to Strengthen Social Security honor them in full — it merely means that we must be honest with ourselves about the true cost of paying Social Security benefits. For too many, the trust fund serves as an excuse to put off much‐needed action.
During the next 75 years, Social Security faces a $23 trillion gap (in today’s dollars) between the benefits it has promised and those it actually can pay. The aim of reform is to fill this benefit gap, enabling Social Security to meet its promises.
Traditionally, the “solution” to Social Security’s financing problems was to raise taxes, reduce benefits and increase the retirement age. The last major “reform” in 1983 did all three, proving exactly how insecure Social Security’s politically determined benefits can be: With the stroke of a pen, workers were told they would have to pay more, and for more years, to receive less in retirement benefits.
Today, many reformers reject further tinkering with Social Security’s pay‐as‐you‐go financing in favor of a new approach that is based on real saving and investment in personal retirement accounts. Real saving, in stocks and corporate bonds, builds the economy and earns a higher rate of return than the current program.
The President’s Commission to Strengthen Social Security, headed by former New York Democratic senator Daniel Patrick Moynihan and AOL Time Warner Chief Executive Officer Richard Parsons, put forward three proposals that guaranteed benefits to current and near‐retirees, offered voluntary personal accounts to younger workers and improved Social Security’s financing health. Two commission plans made Social Security permanently solvent. These personal account‐based plans offered workers higher benefits at lower cost than the current program, while giving every worker the opportunity to build real assets and wealth. Opponents of personal accounts reacted with barely concealed rage, their rhetoric rising ever higher in this important election year. Luckily, when countered by the facts, these attacks fall far short.
For instance, critics charge that personal account‐based reform plans will cut benefits by as much as 45 percent. Account opponents conjure up these “benefit cuts” by counting the benefits the current program promises but not the increased taxes required to pay them, while for reform proposals they count the taxes needed to fund personal accounts but not the benefits accounts would pay. This comparison isn’t apples and oranges; it’s apples and elephants.
The nonpartisan Congressional Research Service warned in August of 2001 against using such reasoning: “Comparing a proposal’s projected benefits to those resulting from the rules of current law can be misleading, since the full amount of benefits promised under current law would not be payable under the trustees’ projections. For example, a proposal that is shown to result in benefits that are 10 percent or 20 percent lower than under current law may at first glance appear politically unattractive, but may appear less so if compared with the 27 percent reduction in benefits that would have to occur if policymakers were to take no action.”
An honest evaluation tells a very different story. For instance, a 25‐year‐old woman who earns a low wage and will retire in 2042 is “promised” $896 (in today’s dollars) per month from the current Social Security program. However, because Social Security will be insolvent in 2042, by law the program can pay her only $655 per month (with larger cuts in future years).
Under the commission’s proposal, this same woman could expect to receive $611 in traditional benefits from the government plus $375 from her personal account for a total of $986 per month. Her benefits would be $331 per month more than Social Security will by law be able to pay and $90 more than Social Security even promises. Does this sound like a benefit cut to you?
Reform opponents counter that the “transition cost” of implementing personal accounts would bust the budget. But the President’s Commission plans reduce the $23 trillion in additional tax revenue needed to prop up the current system by up to 68 percent. Budgetary pressures are a reason for the commission’s plans, not against them.
Critics also accuse the commission’s plans of raising the retirement age. In fact, none of the plans would alter Social Security’s retirement age by even a day. Moreover, since commission proposals would pay higher benefits than the current program, personal accounts could enable workers to retire earlier than under current law. For instance, the 25‐year‐old, low‐wage woman cited earlier would have to work past age 70 under the current program to receive the same benefits that she could receive at age 65 under the commission’s Plan 2.
Reform opponents also charge that personal accounts would force workers into the stock market, risking their retirement savings as Enron employees did. In fact, all account plans are voluntary, and no worker with an account is required to invest even a penny in the stock market. In addition, the President’s Commission modeled its personal accounts after the federal Thrift Savings Plan (TSP), which requires that government workers invest only in approved, low‐cost, diversified stock‐and‐bond mutual funds. Millions of federal workers are happy with the TSP. Shouldn’t ordinary Americans have a similar option?
Moreover, a recent National Public Radio poll showed that most Americans think the Enron scandal is a reason for personal accounts, not against them. Individuals were asked to respond to the following statement: “This is not the time to turn Social Security over to the stock market. We need changes to improve Social Security, but not ones that reduce the guaranteed monthly benefits for future retirees. Or, what happened at Enron proves people need more choice and to be in control of their own retirement options, including the right to invest a portion of their Social Security taxes into government‐approved and diversified mutual funds?” By 55 to 39 percent, respondents said that Enron’s collapse strengthened the case for personal accounts.
Perhaps the most scurrilous charge of all is that reform would cut benefits for current retirees. These accusations are made for one purpose: to scare seniors into the voting booth. A May 2001 McLaughlin & Associates poll found 63 percent of seniors would support personal accounts for younger workers if their own benefits still would be paid. If seniors were to join the nearly two‐thirds of working‐age Americans who already support personal accounts, the political game would be over.
But charges of benefit cuts for current retirees are just plain false. Under all plans from the president’s commission, individuals older than age 55 remain in the current program and are guaranteed everything they have been promised. For those 55 and older, nothing would change — nothing.
Reform opponents say personal accounts would take the security out of Social Security. But if Social Security is an insurance policy, it’s a very expensive one. Today, a low‐wage worker can pay one‐eighth of his wages into Social Security all his life and still retire into poverty. Where is the security in that? By contrast, commission plans guarantee that a minimum‐wage worker would retire above the poverty line, lifting up to 1 million seniors out of poverty. This would give workers not just security, but dignity.
Today, one‐third of black men entering the workforce will not live long enough to collect a penny in retirement benefits. They pay a lifetime of taxes with nothing to leave behind. Where is the security in that? Commission plans would enable a low‐wage worker to pass on $70,000 or more to his spouse, children or heirs.
Today, Social Security allows 12 percent of women to retire into poverty, versus only 7 percent of men. Among widows, divorc�es or never‐married women, poverty rates can approach 25 percent. Where is the security in that? Commission reform plans give new rights to divorced women and raise benefits for 2 million to 3 million widows, freeing countless women from poverty in their old age.
Today, a worker has no legal right to his Social Security benefits. The Supreme Court has ruled that, with the stroke of a pen, Congress may raise taxes or cut benefits at any time, by any amount, for any reason — or no reason — at all. Where is the security in that? Personal accounts give each worker a legal property right to his Social Security savings. Instead of a politically determined entitlement, he gets a legally owned asset.
Social Security’s independent actuaries confirm that personal‐account plans from the commission would pay higher benefits at lower costs than the current program, enhance the program’s financing, strengthen the Social Security safety net and reduce poverty, while giving all workers the chance to build wealth and pass it on in a voluntary personal accounts.
Personal‐account opponents have a perfect right to air their views, and in an election year it’s to be expected that politicians will push the truth a little far. But account opponents also have an important obligation to construct their own reform proposals. What would account opponents do to keep Social Security solvent? Raise taxes? Cut benefits? Increase the retirement age? Let the government itself invest in the stock market? It’s anybody’s guess, since almost to a man, personal‐account opponents refuse to put their own reform proposals on the table.
Until they do, we only can assume that they favor the status quo. The problem is, under the status quo Social Security goes broke, dragging millions of seniors into poverty. Americans deserve more than that from their Social Security program, and they deserve more than that from their politicians.