Addressing Social Security

“Reforming Social Security is almost certain to figure prominently in President Bush’s reelection campaign next year,” reports Peter Savodnik in a recent issue of The Hill newspaper. President Bush supports saving Social Security with personal retirement accounts, where workers would own a portion of their retirement contributions, and promises to those in or near retirement would be kept. Democratic candidates haven’t been as forthcoming with solutions. When CSE’s New Hampshire State Director Chuck McGee recently pressed Democratic candidate John Edwards to take a stand on the issue Edwards replied, “I do not believe in private security accounts,” but offered no alternative.

No alternative is no longer an option. As voters know, Social Security will go broke if it isn’t reformed. The current system relies on payroll taxes (FICA) from workers to pay benefits to retirees. This worked well when the program began and there were 40 workers paying taxes to support every one retiree. But today there are just 3.4 workers for each retiree—too small a base to keep the pyramid scheme that is Social Security from collapsing.

The much talked about trust fund won’t save Social Security because it doesn’t have any money in it—and it never has. Tax money comes in, retirees are paid, and any surplus is turned over to the Treasury in exchange for government bonds, leaving the government-owned trust fund with nothing but government-issued I.O.U.s.

When the government writes itself a Social Security I.O.U., it is effectively forging the signature of future generations on an I.O.U. that reads, “We, the children of today, promise to pay higher taxes when we start working because Congress wouldn’t reform Social Security in 2003.” This is exactly how revenue shortfalls have been dealt with in the past. Social Security taxes have been raised 20 times since the programs inception.

It is time to use creative solutions to end this vicious cycle of raising taxes to pay old promises. President Bush’s Commission to Strengthen Social Security, co-chaired by the late Democratic Senator Daniel Patrick Moynihan, concluded, “The system is not sustainable as currently structured…the time to include personal accounts…has, indeed arrived.”

Personal retirement accounts would be funded by the FICA tax already taken out of our pay. But, instead of being spent, it would stay in an account owned by the person who earned it, like an IRA or 401(k). Surprisingly, workers have not owned their contributions since the 1950s when the Supreme Court said, “To engraft upon the Social Security system a concept of ‘accrued property rights’ would deprive it of the flexibility…which it demands.” In other words, if we owned it, politicians would not be able to take it away by cutting our benefits. Personal retirement accounts would shift control of our retirement security from the promises of politicians to the safety of our savings accounts.

Anyone opting into a personal retirement account before turning 40 would earn a better return than the government can offer. Social Security’s average rate of return is about 2 percent, and declining. But an average 30-year-old white male will see a negative 0.5 percent return on his contributions. Since 1926, the average rate of return on the stock market, after inflation, has been over 7 percent.

But personal accounts aren’t just about putting money into stocks. Conservative investors could put their money into bonds, which return 3 percent to 4 percent. We would become a nation of investors, and have a wide range of diversified options to choose from, like those who can afford to do today.

If a 35-year-old earning $33,200 per year were allowed to put his payroll tax into a personal account earning just 3 percent, he would have $411,052 at retirement—enough for $2,671 per month. Under the current system, he can expect just $1,559 per month.

Women, low-wage earners, and minorities would particularly benefit from such a system. The current system leaves twice as many women in poverty as men, and working wives and widows are discriminated against. Low-wage earners who are left with little to save after paying 12.4 percent of their income to Social Security taxes would finally become shareholders in the U.S. economy. Blacks retiring at 65 have a life expectancy of two years less than whites—that’s 24 fewer payments. Under the current system, the government keeps these extra payments—effectively a 100 percent death tax. With personal retirement accounts, money not spent could be passed on. Should funds fall short, a government safety net would be maintained as insurance, which is what Social Security was initially meant to be.

But the current system is not ensuring at all. It will fall short by $25.33 trillion over the next 75 years—an amount that grows with each day of inaction. Its time for politicians to take action and make personal retirement accounts a reality, guaranteeing a successful retirement and a piece of the American dream for everyone.