Kemp Urges Support for Personal Retirement Accounts (PRAs)

Dear Colleague,

Social Security reform legislation has been introduced in the U.S. House of Representatives by Congressman Paul Ryan, H.R. 4581, that would permit workers to redirect part of the payroll tax into personal retirement accounts or choose to stay in the current system. A companion bill is being introduced in the Senate by Senator John Sununu. I am writing to urge you to support this important legislation.

The main components of the reform plan are:

The personal retirement accounts would be insured by the full faith and credit of the United States, guaranteeing workers that they would receive at least as much as Social Security promises under current law.

Workers would be free to choose to save and invest approximately half the payroll taxes into personal retirement accounts, 10 percentage points on their first $10,000 in wages and 5 percentage points on all wages above that up to the maximum Social Security taxable income ($87,000 this year). This arrangement will create a progressive accounts structure with an average account contribution of 6.4 percentage points of current payroll tax liability.

Workers would choose investments by picking a fund managed by a major private investment firm from a list officially approved for this purpose and regulated for safety and soundness, similar to the operation of the Federal Thrift Retirement System.

For those workers who choose to remain in the current system, there would be no reduction in currently promised benefits. Survivor and disability benefits as well would continue under the current system unchanged.

The transition costs of the reform can be financed by four factors:

o Short term Social Security surpluses projected until 2018.

o Reducing the rate of growth of Federal spending by one percentage point per year for eight years, and devoting those savings to the transition, which would allow federal spending to grow at about the same rate as it did during the Clinton years.

o The revenue feedback from increased saving and investment in the accounts due to taxation of increased investment returns at the corporate level.

o To the extent necessary, the sale of surplus Social Security trust bond funds.

This proposal has already been reviewed by the Chief Actuary of the Social Security Administration. That official score shows:

With the transition financing in place, the large personal retirement accounts are sufficient to completely eliminate the Social Security deficit over time because so much of Social Security’s benefit obligations are ultimately shifted to the accounts.

Not only do the accounts achieve this with no benefit cuts or tax increases, but, over time, the accounts would allow for substantially higher benefits and substantial tax cuts. In fact, the official score shows that by the end of the 75 year projection period, the payroll tax would be reduced to 3.5 percent. The reform bill includes a payroll tax-cut trigger providing for this eventual payroll tax rate reduction once all transition financing and debt obligations have been paid off.

Assuming historical market returns, the accounts would produce significantly more in benefits for working people across the board than the current Social Security system now promises, but won’t be able to pay.

The reform program also would eliminate the unfunded liability of Social Security, which is estimated at over $10 trillion.

Finally, this reform legislation would greatly increase and broaden the ownership of wealth and capital in America. The personal retirement accounts would accumulate to more than seven trillion in present-value dollars, making it the largest-ever expansion of personal wealth for working people.

This reform plan protects the current benefits of senior citizens while allowing large personal retirement accounts for all workers who choose to opt into the personal retirement account system. All the while, a strong social safety net remains in place for all workers.

I strongly encourage you to join Rep. Paul Ryan as an original co-sponsor of H.R. 4581.

Very sincerely yours,

Jack Kemp