Now that the elections are over, Democrats are suggesting a new willingness to address the need for Social Security reform. Max Baucus, D-Mont., incoming chairman of the Senate Finance Committee, announced plans to hold hearings on proposals to fix the program’s looming financial crisis.
“All options are on the table,” according to House Majority Leader Steny Hoyer, D-Md., including tax increases, benefit cuts and changes in the retirement age.
Well, maybe not all options. Democrats remain unwilling to even discuss President Bush’s plan for allowing younger workers to privately invest a portion of their Social Security taxes through personal accounts.
Baucus and Hoyer should be commended for their willingness to take up the contentious issue of Social Security reform, especially since most Democrats have spent the last two years denying that there was any Social Security crisis.
And they have the honesty to admit that any reform in the absence of private investment is likely to involve either new taxes, benefit cuts or both.
The need for Social Security reform is obvious. Social Security will begin running a deficit in just 11 years.
Of course, in theory, the Social Security Trust Fund will pay benefits until 2040. But 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 completely exhausted by 2040.
At that point, Social Security will have to rely solely on revenue from the payroll tax, and that revenue will not be sufficient to pay all promised benefits.
According to Social Security’s trustees, the system’s unfunded liabilities — the amount it has promised beyond what it can actually pay — now total $15.3 trillion.
Still, while solvency is important, the goal of Social Security reform should be more than just balancing the books.
We should try to provide workers with the best possible retirement options, and that involves giving them more control and ownership of their retirement funds.
Social Security taxes are already so high relative to benefits that Social Security has quite simply become a bad deal for younger workers, providing a low, below-market rate of return. In fact, many young workers will end up paying more in taxes than they receive in benefits.
They will actually lose money under the program. While the tax increases and benefit cuts envisioned by Hoyer and Baucus would restore Social Security to solvency, they would also make Social Security an even worse deal for younger workers, who would end up paying more and receiving less.
But the single most important problem with the current Social Security system remains that workers have no ownership of their benefits.
This means that workers are left totally dependent on the goodwill of 535 politicians to determine what they will receive in retirement.
This lack of property rights also translates to poorer bequests. Since workers do not own the money they pay in Social Security taxes, they are unable to pass their inherited retirement savings on to their heirs.
No matter how much a worker has paid in Social Security taxes, his benefits are reduced at death and then expire with the spouse. The only way to address all of Social Security’s problems is to allow workers to own, control, and invest at least a portion of their Social Security taxes.
It is, after all, their money.
President Bush should make it clear that he is willing to work with Democrats to achieve a bipartisan deal on Social Security reform, as long as all options are truly on the table.
All options includes personal accounts.