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SAVING SOCIAL SECURITY FIRST:
THE PERSONAL SECURITY ACCOUNT OPTION
Stephen Moore
Director of Fiscal Policy Studies
President Clinton is to be commended for convening the bipartisan
summit on saving Social Security. One issue that all sides should
be able to agree is that we have to act now to solve the $5 to $10
trillion funding shortfall in the Social Security system. If we
wait 5 or 10 years the financing crisis will be right upon us, and
our range of options to save the system will be far more limited.
We can see the Titanic headed for the iceberg, we need to start
turning the ship around immediately.
In April of 1998 during the first town hall meeting on Social
Security convened by the White House, President Clinton declared:
The Social Security system must remain universal, fair, and must
deal with the problems of the disabled and the poor. If you do all
that, could you construct some system which also made allowance
for private accounts? I think you could, yes.
I think he is right. For the past 20 years the Cato Institute has
endorsed transforming Social Security from a pay-as-you-go system,
to a fully financed, individually invested program. In other words,
American workers should be permitted to fully and immediately
invest their Social Security payroll taxes (12 percent of their
paycheck) into Personal Security Accounts (PSAs). There are 3
critical safety features to the PSA plan that I believe would
satisfy the President's concerns:
- Every American currently receiving (or about to receive) Social
Security benefits will be guaranteed that his or her payments will
not be cut. Seniors should be held harmless to the change.
- All American workers will be given the option of staying in the
traditional Social Security system or investing their money in a
PSA that is controlled and owned by the individual worker.
- Every worker, whether they stay in Social Security or choose a
PSA, will be guaranteed a minimum retirement benefit when they
retire. In other words, there will be a safety net feature to the
program.
Why should American workers and politicians favor converting Social
Security to a system of PSAs? Because it offers workers a better
deal. Even if workers were required to invest in non-risky investments,
the rate of return on their money and their subsequent retirement
income would be substantially higher than if it remained in the
Social Security system. This statement is true whether the worker
is black or white, man or woman, rich or poor, married or single.
A median income worker born in 1970 will receive a Social Security
benefit of $1,429 (assuming benefits are not cut), but with a 10
percent PSA invested in 40% bonds and 60% stocks the worker would
receive a monthly benefit of $2,654. If the entire 12 percent
payroll tax were put in a PSA the benefit would exceed $3,000 per
month.
The general rule of thumb is that a typical worker would have a
benefit twice as high under PSAs than Social Security. This analysis
reasonably assumes that over the next forty years the return in
financial markets will be comparable to the average rate of return
from 1926-96. Americans who wish to assess how they personally
would fare under a PSA system should try the Cato Institute's Social
Security calculator on our web page: www.socialsecurity.org.
It is important to emphasize that virtually all of the Social
Security "reforms" proposed by opponents of PSAs would simply lower
the already poor rate of return for young Americans. In other words,
any "reform" option that raises the payroll tax rate or the payroll
tax income threshold, that lowers future benefits, or that raises
the retirement age, only worsens the rate of return for today's
worker and future generations. These options should therefore be
rejected. We talk a lot about "fairness" in Washington. If fairness
is to be one of our guiding principles in the search for a Social
Security solution, we should not force our children to pay more in
or get less out of a system that is already severely inequitable
to them.
How can we finance the transition from pay-as-you-go financing to
a fully funded PSA system? First, we should dedicate every penny
of the current Social Security surplus to helping finance PSA's
while still paying benefits to seniors. Over the next 10 years this
surplus will amount to nearly $1 trillion. Second, we should examine
other areas of the federal budget that could be reduced and dedicate
the savings to helping finance PSAs. We at Cato have identified
almost $100 billion a year in corporate welfare. Cut these Fortune
500 subsidies and use the savings to finance PSAs. Finally, the
federal government should issue 50 year liberty bonds- -taking
advantage of the current low long term interest rates--to fund the
remaining transition to PSAs. This reasonably spreads the cost of
the transition to a new Social Security retirement system across
future generations. This seems to be an equitable solution, since
future generations will be the primary beneficiaries of a fully
funded, high rate of return, PSA system.
Stephen Moore is director of fiscal policy studies at the Cato
Institute.
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