This is not to say that the Federal government will default on the bonds in the Trust Fund. I am not doubting the “full faith and credit” of the U.S. government. However, that does not relieve the Federal government from the obligation to find the money with which to redeem those bonds, currently $1.6 trillion in present value terms. To put it in perspective, think of it this way. In 2018, the first year after Social Security begins running a deficit, the shortfall will be roughly as much as the Federal government spends on such programs as Head Start and the WIC program. The cost rises rapidly thereafter. By roughly 2023, the cost of redeeming enough Trust Fund bonds to pay all the promised Social Security benefits would be nearly as much as the cost of funding the Departments of Interior, Commerce, Education, and the Environmental Protection Agency. By 2038, well before the theoretical exhaustion of the Trust Fund, you can add the Departments of Veterans Affairs, Energy, Housing and Urban Development, Justice, NASA, and the National Science Foundation. Simply redeeming the Trust Fund will begin to squeeze out all other domestic spending priorities.
Beyond 2042, once the Trust Fund is exhausted, the deterioration in Social Security’s finances only increases‐and never gets any better. Overall, the present value of Social Security’s unfunded obligations run to nearly $12.8 trillion (approximately $1.6 trillion to redeem the Trust Fund, and $11.1 trillion in unfunded benefits thereafter).
However, as troubling as these numbers may be, I believe that the debate over Social Security reform should not solely‐or even primarily‐be a discussion of solvency. Yes, solvency is important, and any responsible Social Security reform plan should restore the program to solvency, not just short‐term actuarial solvency, but permanent, sustainable solvency.
Still solvency is not enough. Instead, Social Security reform should strive to build the best possible retirement system for our children and our grandchildren. Thus, Social Security’s current situation should not be seen as either a crisis or a problem, but as an opportunity to build a new and better program, based on the fundamental American values of ownership, inheritability, and choice.
Under the current Social Security system you have no legal, contractual, or property rights to your benefits. What you get receive from Social Security is entirely up to the 535 members of Congress. But personal retirement accounts would give workers ownership and control over their retirement funds. The money in your account would belong to you‐money the politicians (with all due respect) could never take away. In short, they would own their retirement.
Because you don’t own you Social Security benefits, they are not inheritable. Millions of workers who die prematurely are not able to pass anything on to their loved ones. But personal retirement accounts would enable workers to build a nest egg of real, inheritable wealth.
Choice is part of the essence of America. Yet when it comes to retirement, Congress forces all Americans into a one‐size‐fits‐all, cookie‐cutter retirement program, a system that cannot pay the benefits it has promised and in which we have no right to the money we pay in. With personal retirement accounts, workers who want to remain in traditional Social Security could do so. But younger workers who want a choice to save and invest for their retirement would have that option.
With this goal in mind, not just to restore Social Security to solvency, but to build a better retirement program that would give workers more ownership and control over their money, scholars at the Cato Institute drew on our 25 years of experience studying Social Security, and developed a comprehensive proposal for creating privately invested, personally owned accounts as part of an overall reform of the Social Security system. This proposal became the basis for legislation introduced, on July 19, 2004, by your colleague Rep. Johnson along with 18 original co‐sponsors.1 Rep. Johnson, together with Rep. Jeff Flake and 11 co‐sponsors, reintroduced the bill in the 109th Congress, on January 21, 2005.2
Under this proposal, workers under the age of 55 would have the option of diverting their half of the Social Security payroll tax (6.2 percent of wages) to an individual account. The employer’s portion of the payroll tax would continue to be paid into the Social Security system to provide survivors and disability benefits, as well as to partially fund continuing benefits for those already retired or nearing retirement. Workers choosing the individual account option would forgo any future accrual of Social Security retirement benefits. However, those workers who have already paid into the current Social Security system, and therefore have accrued benefits, would receive credit for those benefits in the form of a recognition bond. This fully tradable bond would be a zero coupon note maturing on the date of the recipient’s normal retirement age.
Workers who do not choose the individual account option would continue to pay into and receive benefits from the current Social Security system. However, for these workers, the initial Social Security benefit formula will be adjusted to reflect price‐indexing rather than the current wage‐indexing. The result will be to restore Social Security benefits to a level payable with Social Security’s available revenue, while ensuring that future retirees continue to receive the same level of benefits as those retiring today, on an inflation‐adjusted basis. This change will be phased in over a 35‐year period, beginning in 2014.
This should not be seen as a benefit “cut.” Indeed, benefits will be higher in the future than they are today. While it is true that future benefits would be less than what Social Security promises, such comparisons are meaningless because unless there is a substantial increase in taxes, the program cannot pay the promised level of benefits.
That is not merely a matter of conjecture, but a matter of law. The Social Security Administration is legally authorized to issue benefit checks only as long as there are sufficient funds available in the Social Security Trust Fund to pay those benefits. Once those funds are exhausted, in 2041 by current estimates, Social Security benefits will automatically be reduced to a level payable with existing tax revenues, approximately 73 percent of current benefit levels.3
This, then, is the proper baseline to use when discussing Social Security reform. Social Security must be restored to a sustainable level regardless of whether individual accounts are created.
As the Congressional Budget Office puts it: