Term limits for committee chairmen in the House of Representatives mean a crop of fresh faces will be crafting important legislation this year. For those interested in Social Security reform, a welcome new face is that of Bill Thomas, the new chairman of the House Ways and Means Committee. His committee will consider any proposals to change Social Security to a system of personal retirement accounts similar to IRAs or 401(k)s.
Thomas, a California Republican best known for his work on health-care reform, is considered a moderate and a pragmatist. As part of a presidential commission, Thomas joined forces with Louisiana Democratic Sen. John Breaux to craft a compromise approach to Medicare reform to maintain the system's solvency while providing a prescription drug benefit to seniors.
But Thomas has also taken a courageous stand on the other entitlement crisis, Social Security, and his leadership and views could be important in a year in which President Bush vows to reform the system through personal retirement accounts.
Bush has proposed allowing workers to invest about 2 percentage points out of the 12.4 percent total Social Security payroll tax in personal accounts, which would hold stock mutual funds and high-grade corporate bonds. This is a good idea. Without such a bold proposal to address a large policy problem, it is doubtful Bush could have defeated a sitting vice president in good economic times.
The higher return on investment in Bush's 2 percent personal accounts will help, but alone they are not enough to make Social Security solvent permanently. One solution to fill the gap is to raise the retirement age, trim benefits, reduce cost of living adjustments or means-test benefits to the better-off. But in 1996, before many in Congress had contemplated Social Security reform, Bill Thomas realized that "there is a better approach."
Thomas introduced legislation to create what he calls "Social Security IRAs." Thomas' bill would let workers invest half of their payroll taxes, 6.2 percent out of the 12.4 percent total, in personal accounts that would grow tax-free until retirement, where they would be used to pay a monthly benefit. These accounts, Thomas said, "incorporate the best of the present Social Security system and also provide the worker with a role in personal retirement planning. The worker's portion of the Social Security tax is placed in a federal insured depository institution of the worker's choice." By saving and investing more money today we would reduce the need for benefit cuts or other unpleasant changes in the future.
Thomas's legislation never passed. But with a new president bent on reform Thomas's recognition of the need for increased investment could bear fruit. Workers investing half their payroll taxes in personal accounts could see substantially higher benefits than under the current system for the simple reason that market investments reap much higher returns than Social Security. The current system's return to today's workers will be well under 2 percent annually, while even the safest investment in the world — inflation-indexed Treasury bonds — yield double that. Investing in broad-based stock funds or corporate bonds could raise returns higher.
Of course, if we want more investment today that means less of the budget surplus for other projects. If Thomas wants to leave his stamp on Social Security, he not only will have to shepherd reform legislation through Congress but must also convince his election-minded colleagues to curb their appetites for spending.
New faces chairing congressional committees can mean new solutions to old problems. Bill Thomas's proposal to let workers invest half their Social Security taxes in personal accounts is such a solution. If Thomas sticks with this plan, President Bush could find a powerful new ally in Congress.