Gov. George W. Bush and Vice President Al Gore have spent plenty of time attacking each other's Social Security proposals, and the election season has created ample opportunities for jargon, obfuscation and scare tactics in the service of one position or another. So let us get back to basics: Why does Social Security need reform in the first place, and what do the candidates want to do about it?
Social Security's problem is twofold: We're living longer, and we are having fewer children. That means more retirees to be supported and fewer workers to do the supporting. If the current system is to deliver promised benefits, workers will have to pay more (by current calculations, the 12.4 percent Social Security payroll tax will have to increase by up to 50 percent) or benefits must be cut by up to 30 percent. No one wants to see either of those things happen — so what can be done?
Mr. Bush's idea is to allow workers to invest a portion of their Social Security payroll tax in personal retirement accounts such as IRAs or 401(k)s. These accounts, invested in broad-based mutual funds and high-grade corporate bonds, would earn returns far higher than the mere 2 percent the current system produces. A Congressional Research Service study found an account investing just one-sixth of the 12.4 percent total payroll tax could actually pay two-thirds of a typical worker's retirement benefits if it earned average historic stock returns. Even at the low Treasury bond rate an account could pay more than one-quarter of final benefits. This is how personal accounts higher returns can put Social Security's troubled finances back on track.
But if we divert payroll taxes to personal accounts, how will we pay benefits to those already retired? That is where the budget surplus comes in. Social Security will run a surplus of almost a trillion dollars over the next 10 years. Ordinarily, that money is simply spent and an IOU to be repaid by future taxpayers is placed in the trust fund. But instead of spending the Social Security surplus, the Bush plan would invest it in workers' personal accounts. And, if we save the non-Social Security surplus, throwing up to $3 trillion more into the mix, personal accounts could be larger, and long-term earnings even greater. To be sure, saving Social Security for tomorrow means spending less of the surplus today, but preventing the program's insolvency and increased poverty for seniors is worth the sacrifice.
Balancing Social Security's books isn't the most important benefit of personal retirement accounts. What really matters is that they empower ordinary people to control their lives. They give people an opportunity to be self-reliant, to amass wealth and pass it on to their children and grandchildren. Psychologists find personal happiness isn't so much based on wealth or success as it is based on the feeling you control your own life. The current system breeds insecurity and anxiety as workers and retirees watch their future become a political football each election year. Personal accounts provide benefits money can't buy.
The vice president's plan to maintain the current system by repaying government debt and crediting it to the trust fund has come under fire from independent government agencies and private watchdogs alike. First, there is no guarantee the Gore plan would even repay the debt. And even if it does so, the plan's trust fund gimmickry, as the nonpartisan Concord Coalition put it, means Social Security won't be half as secure as the vice president claims. But again, dollars and cents are not the only issues at stake. Americans enjoy better education and technology than ever before, and are ready to have a say in their retirement planning.
President Lincoln said government should do only those things that individuals and communities cannot do for themselves. Saving for retirement might once have been one of those things, but today — with the highest level of investment in history, the simplest and safest investment vehicles, and the Internet to make it all accessible —the government's role should be restricted to a safety net.
The Bush plan lacks full details, which his campaign says will be negotiated with Democrats and Republicans following the election. Anyone with experience on Capitol Hill knows that postelection compromises with Congress are inevitable. But the core of the Bush plan — empowering ordinary workers to plan and control their own future — is one that both parties should build on.