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Personal Retirement Accounts
Why CSE Cares
There are twin crises facing the Social Security system, and our national political leaders cannot hide from this reality:
The first crisis is financial. If nothing is done, the system will begin running cash deficits in just 15 years and will need to be bailed out with $11.3 trillion worth of new income taxes or government borrowing to pay its bills. The program’s long-term liabilities are a whopping $22 trillion - six times today’s national debt.
The second crisis is personal. For younger workers, Social Security is becoming a bad deal. Most younger workers are likely to get a pitifully low 1% to 2% return on their FICA tax contributions. Many minority workers will actually get back less from the system than the amount of taxes they paid into it. After a lifetime of working, that is not fair.
The CSE Position:
CSE has long supported the idea of workers being able to invest a portion of their Social Security taxes in asset-building accounts - owned and controlled by them - that provide a real nest egg for retirement.
We believe that Personal Retirement Accounts are the key to giving workers a better return on the money they put into the system, a chance to accumulate real wealth, and gain personal control over their retirement security.
Moreover, Personal Retirement Accounts (which have worked successfully in countries such as Chile, Australia and Great Britain) are also the most sensible way to reduce Social Security’s long-term liabilities because these accounts effectively "pre-fund" the retirement costs of tomorrow’s senior citizens.
More importantly, Personal Retirement Accounts will have the most profound effect on closing the growing "wealth gap" between the nation’s rich and poor. Although more than half of all Americans now invest in the stock market, the wealth divide has been growing over the past seven years. Personal Retirement Accounts, however, would allow 100% of American workers to become stakeholders in the U.S. economy. Imagine the social implications of allowing every worker to own a piece of the American Dream.
The best way to increase the rate of return on workers’ Social Security contributions while we reduce the system’s long-term liabilities is through Personal Retirement Accounts. Given the size of Social Security’s current surpluses, we could allow workers to divert as much as three percentage points of their 12.4% payroll tax into personal accounts without affecting the amount of money Social Security needs to pay current benefits.
The current system will be short of cash in 15 years. Not reforming Social Security will saddle future generations with over $22 trillion of liabilities - six times our current national debt.
Most younger workers are likely to get a paltry 1% to 2% return on their payroll tax contributions.
Many minority workers will actually get back less from the system than the amount of taxes they paid into it.
We must guarantee current retirees that they will continue to receive every dollar of Social Security benefits that they’ve been promised.
Personal Retirement Accounts are the key to giving workers a better return on the money they put into the system, a chance to accumulate real wealth, and gain personal control over their retirement security.
CSE’s Five Principles for Sound Social Security Reform:
1) Guarantee current retirees that they will continue to receive every dollar of Social Security benefits that they’ve been promised.
2) Allow working Americans to divert a portion of the 12.4 % payroll taxes they now pay into the Social Security system into Personal Retirement Accounts that they - not politicians - control.
3) Allow working Americans to invest their Personal Retirement Accounts with a broad range of government-approved and government-regulated investment companies, including stock brokerage firms, banks and insurance companies. A portion of their payroll taxes would be sent to the investment company of their choice rather than to Washington. And there is always the option to stay in the Social Security system.
4) Guarantee Americans that they would receive at least as much in benefits with their Personal Retirement Accounts as they are now promised by Social Security. If their accounts fall short, the government would make up the difference.
5) Grant every American full control of their retirement nest egg and the right to pass on any unused funds to their family or favorite charity.
Frequently Asked Questions on
Personal Retirement Accounts
Q: How would a system of personal retirement accounts work?
A: Workers would be free to redirect a portion of their payroll taxes into retirement investment accounts managed by a wide range of government-approved and regulated companies. Firms such as major banks, insurance companies, brokerage houses, mutual funds, labor unions, and AARP would apply to an independent government board for certification.
Investment returns earned by the accounts would be tax free. The tax treatment of distributions from the accounts would be the same as for Social Security. No withdrawals would be allowed from the accounts until age 59 ½, as with IRAs.
In retirement, workers could use their funds to buy an annuity, paying a promised monthly sum for the rest of their lives, or they could live on the continuing investment returns on their fund and leave all of the principle to their children or favorite charity.
Q: Aren’t there considerable risks involved in a Personal Retirement Account system. What’s the truth?
A: First, we already know Social Security is becoming a raw deal for young, working Americans. This is especially true for minority and blue-collar workers. They will likely get less back in benefits than they paid into the system. Personal Retirement Accounts represent a huge upside to these workers. (And, don’t forget, Social Security faces a $22 trillion unfunded cash shortfall.)
Nonetheless, a new system of Personal Retirement Accounts would include a guaranteed minimum benefit for all workers at least equal to the benefits they would have received from Social Security. And, workers would be free to stay in the Social Security system if they preferred not to subject themselves to the risks and rewards of the investment market.
However, as is now well known, the average real return on stock market investments over the past century is about 7%. Studies have also shown that the worst 30 year performance of the stock market in U.S. history provided a real return of 5.2 %. Indeed, the worst 63-year performance (reflecting an adult lifetime) provided a real return of 6.3%.
Q: Won’t there be huge transition costs as we shift from the current system into a system built on Personal Retirement Accounts? In other words, won’t workers be forced to pay for two systems at the same time, their own retirement and the retirement of their parents?
A: First, let’s remember that Social Security’s current unfunded cash shortfall is $22 trillion in today’s dollars. Since those are the costs of doing nothing, it’s safe to assume that the costs of changing to a pre-funded system, even while paying the benefits of today’s retirees, will be considerably less.
In fact, moving to a pre-funded system through Personal Retirement Accounts will substantially reduce the program’s massive unfunded liabilities which, in turn, substantially reduces the tax or debt burden on the next generation of workers.
There are many possible sources of financing for this transition, including:
·Tap the $3.5 trillion in projected Social Security surpluses over the next 15 years;
·Tap some of the roughly $1.5 trillion in non-Social Security surpluses projected over the next 15 years;
·Sell "transition" bonds which would be retired after the transition is completed.
Q. Have Personal Retirement Accounts been used anywhere else?
A. Yes, in many countries such as Chile, Australia and Great Britain. In fact, nearly 20 years ago, Chile began allowing workers to opt into personal retirement accounts after its social insurance system collapsed. Since then, the personal retirement accounts of Chilean workers have received an average rate of return of 9% per year.
Questions To Ask Policymakers
About Social Security Reform
Will you support a plan that allows workers to privately invest a portion of their Social Security contributions?
Given that Social Security will be running a deficit in 15 years, what steps can we take to ensure that young Americans will not be hit with higher taxes?
Do you think that we, as responsible adults who understand our own needs and goals, are better equipped than government to make decisions about investing for our own retirements?
What will you do to make the impersonal, one-size-fits-all Social Security system more responsive to our individual retirement needs and goals?
Sample Letters to the Editor
Dear Sir or Ma’am:
I strongly disagree with your [editorial/column] suggesting that a Social Security reform plan based on allowing younger workers to investing in personal retirement accounts is "risky." What is risky, is perpetuating a system that will force tomorrow’s workers to pay higher taxes or bear a larger national debt while they pay into a system that will give back less in retirement than they paid into it.
The facts are clear. In just 15 years, Social Security will start to spend more on benefits than it collects in taxes. Ten years later those deficits will reach nearly $500 billion, and in 2037 (when today’s 30-year olds retire) the shortfall will top $1 trillion. No matter how many IOUs are in the so-called Trust Fund, the only way to cover these cash deficits is to raise taxes or increase the national debt. Doing nothing to stop these unaffordable liabilities is irresponsible.
But the biggest risk younger workers face is entrusting their retirement to a program that is increasingly becoming a very bad deal for them. According to studies, a typical working couple today will earn less than a 1.5 percent return on a lifetime of paying Social Security taxes. While that is outrageous, the return is even worse for African-American or Hispanic workers.
But allowing younger workers to invest a portion of their payroll taxes into Personal Retirement Accounts will give them a better return on the money put into the system, gain personal control over their retirement security, and build a nest egg that can be passed along to their children. The only "risk" is to allow politicians to deny them that opportunity.