Yes
By Peter Ferrara
On Dec. 1, 2003, the chief actuary of Social Security
produced an official “score,” or projection, of the
impact of a reform plan that would allow workers a large
personal account option for Social Security. That score
showed that such a personal account option would solve
the financial problems of Social Security while actually
providing a better deal for today’s workers.
The reform plan was published in a study I wrote for the
Texas-based Institute for Policy Innovation (www.ipi.org)
earlier this year. It starts with the current 12.4
percent Social Security payroll tax. The plan would
allow workers to shift to their own personal investment
accounts 10 percentage points of the tax on the first
$10,000 of wages each year, and 5 percentage points on
wages above that.
Account investments would be made through a structure
where workers would choose from a broad range of
investment funds managed by major firms, approved and
regulated by the government. Benefits from the accounts
would substitute for a portion of promised Social
Security benefits, based on the degree to which each
worker exercised the account option over his or her
lifetime. The entire system would be backed by a federal
safety net guaranteeing that all workers would receive
through the accounts at least what Social Security
promises to pay them under current law.
The fundamental conclusion of the chief actuary was that
under the reform, “The Social Security program would be
expected to be solvent and to meet its benefit
obligations throughout the long-range period 2003
through 2077 and beyond.” Indeed, the chief actuary
projected that under the reform Social Security would go
into permanent surplus in 2029, with no benefit cuts or
tax increases.
This would happen because Social Security’s deficits
would be reduced as the personal accounts take over
payment for more and more of the former system’s
retirement benefits. The transition to the accounts also
would be aided under the plan by restraining the growth
of total federal spending for a period of eight years
and using those funds for Social Security. Increased
revenues for the transition also would result from the
increased savings and investment in the accounts, as
those funds ultimately would finance new corporate
investments that produce earnings subject to corporate
taxation.
In the early years of the reform, excess Social Security
trust-fund bonds would be sold to the public to ensure
all benefits would be paid to today’s retirees while
workers are shifting about half of total payroll taxes
into their personal accounts. Nevertheless, the trust
funds would remain solvent under the reform plan and go
on to grow to excessive levels. The surpluses produced
by the reform after 2029 also would be sufficient to pay
off all the bonds sold to the public within the
following 15 years. Thus, the net impact of the reform
plan on debt held by the public would be zero.
Indeed, during the reform process, Social Security’s
unfunded liability of $10.5 trillion would be
eliminated, as the current, mostly unfunded,
pay-as-you-go retirement system would be replaced by
savings and investment in the accounts. But there is
more. Because market investment returns are much higher
than what Social Security can pay, with its mostly
redistributive, uninvested system, workers across the
board would get much higher benefits through the
personal accounts than Social Security promises, let
alone what it can pay.
In addition, the chief actuary concluded that eventually
the surpluses from the reform would grow so large that
Social Security payroll taxes could be reduced without
endangering the program’s finances. Ultimately, today’s
12.4 percent Social Security payroll tax, instead of
growing to more than 20 percent to pay promised
benefits, would decline to 3.5 percent, with 6.4 percent
on average going into the accounts.
So the reform plan would eliminate the problems of
Social Security without cutting benefits or raising
taxes. Instead, the plan actually would raise benefits
and cut taxes. This would happen because the increased
savings and investment and lower taxes under the reform
would greatly stimulate economic growth and vastly
increase national wealth. This is one of the greatest
opportunities for meaningful and highly beneficial
change for working people in world history.
Peter Ferrara, a senior fellow at the Institute
for Policy Innovation, also is director of the
International Center for Law and Economics and director
of the Social Security Project for the Club for Growth.
|
 |
No
By Peter Diamond and Peter Orszag
Personal IRAs and 401(k) accounts already provide a
useful supplement to Social Security. But diverting
Social Security revenue into individual accounts would
harm workers—and would not help close Social Security’s
deficit. As the private retirement system shifts from
defined benefit to defined contribution plans, causing
workers to bear more financial market risk, it makes
little sense to give workers even more market risk
through a shift to individual Social Security accounts.
Moreover, any realistic system of individual accounts is
unlikely to offer the same protections as Social
Security benefits.
These protections are vital, as Social Security provides
a key layer of financial security during times of
particular need. One-fifth of elderly beneficiaries
receive all their income from Social Security, and
nearly two-thirds receive more than half. The average
Social Security benefit is slightly more than $10,000 a
year, and 20 percent of beneficiaries receive $7,000 a
year or less.
Key to those who rely heavily on Social Security is that
benefits are indexed to inflation and last as long as
the beneficiary lives. This ensures beneficiaries do not
outlive this stream of income or see it eroded by
inflation. Individual accounts could, in principle, have
similar protections. That would require account holders
to use their accumulated account balances for
inflation-indexed annuities, which provide payments for
as long as a beneficiary is alive.
However, individual accounts have been promoted as
enhancing “ownership” of one’s retirement assets. It
seems unlikely that substantial restrictions on how
account holders may use their accounts—such as requiring
annuitization—would be sustained over time. And the goal
of “bequeathable wealth,” a selling point of some
proposals, is in direct conflict with the financing of
benefits that last as long as the beneficiary lives. One
cannot use the same assets for assured benefits during
one’s own lifetime and then again for bequests to one’s
heirs.
Individual accounts also would carry higher
administrative costs. The higher these costs, the lower
the benefits that can be financed. For example, if
administrative costs were 1 percent of assets each year
(which is less than the average equity mutual fund
charges), the level of retirement benefits would be
roughly 20 percent less than could be financed without
the administrative costs. There is no guarantee that the
political process would choose a low-cost system rather
than one with more services and higher fees going to
providers.
Also, financing problems associated with individual
accounts would be substantial. Roughly 85 cents of every
dollar in Social Security tax revenue is used to pay
benefits during the same year. If revenue were diverted
into individual accounts, the reduced cash flow would
worsen Social Security’s financing. To avoid this,
individual accounts would have to be linked in some way
to a reduction in traditional benefits sufficient to
offset the cost of the diverted revenue. Even then,
however, the flow of revenue into the individual
accounts would precede by many years (and often decades)
the offsetting reductions in traditional benefits.
To offset this negative cash flow, it would be necessary
to phase in benefit reductions more rapidly, to provide
additional revenue to Social Security, or to allow
Social Security to borrow from the rest of the budget.
Some individual accounts proposals, such as that of
economist Peter Ferrara, simply assume the ultimate
source will be the rest of the federal budget. Indeed,
Ferrara assumes $7 trillion in transfers from the rest
of the budget over the next 75 years—which is almost
twice as large as the deficit in Social Security itself
over that period. In light of the substantial deficits
projected for the federal budget, any proposal for
transfers that does not identify a specific funding
source seems strikingly irresponsible. Without dedicated
funding, the continuation of Social Security benefits is
at risk.
As we show in our recent book, Saving Social Security: A
Balanced Approach (The Brookings Institution, 2004), we
can eliminate the program’s long-term deficit with
moderate benefit and revenue changes, and without either
undermining its key social insurance protections or
resorting to accounting gimmicks. It is not necessary to
destroy Social Security in order to save it.
Peter Diamond is an economist at the Massachusetts
Institute of Technology and Peter Orszag is an economist
at the Brookings Institution in Washington, D.C.
|
