Moving Ahead on Social Security

“Younger workers should have the opportunity to build a nest egg by saving part of their Social Security taxes in a personal retirement account. We should make the Social Security system a source of ownership for the American people.” – President Bush in the State of the Union address.

With these words, President Bush identifies our best opportunity to move Social Security solvency forward. The Social Security trustees have reported that they expect benefit payments to exceed combined tax collections in about 12 years, and the shortfalls will amount to more than $25 trillion over the next 75 years. This problem, though serious, can be managed if we act soon. As I commented at a press conference on the day after the State of the Union with House and Senate colleagues who are working on this issue, the key is acting soon while we still have surplus payroll taxes coming in.

Since Social Security’s founding in 1935, it has operated on a pay-as-you-go basis. That means that the payroll taxes that workers pay in are not saved. Instead, most of the money is sent immediately to people who are now retired and the rest is spent for other government programs. The idea is that workers pay in for the generations before them, and in exchange, the hope is that another generation will pay for them when they retire.

There are problems with this, however. Because the Baby Boom generation was large and the following generations were smaller, the system is out of balance. The ratio of workers to retirees has fallen from 17 workers per retiree in 1950 to three workers today. It will fall further to two workers in 2030. In addition to threatening the program with insolvency, this places an enormous burden of increased taxes on young workers unless we modernize Social Security. Economists Laurence Kotlikoff and Jagadeesh Gokhale say that a typical man reaching age 65 today will get a net windfall of more than $70,000 over his remaining years. A 25-year-old, by contrast, can count on paying $322,000 more in payroll taxes than he will ever get back in benefits.

There are three potential solutions (or some combination) to the crisis: raising payroll taxes, cutting benefits, and increasing returns on payroll tax contributions by allowing workers to save for their own retirement in safe investments. I’ve introduced a bill in each of my six terms in Congress that incorporates potential solutions. My bills have established worker-owned accounts while restoring the solvency of the Social Security system (confirmed by Social Security Administration actuaries).

If Social Security didn’t exist and we were establishing it today, we’d go along with what the Senate suggested back in 1935, and set it up as a savings program rather than a pay-as-you-go transfer program. We must agree on a fair and gradual way to make the transition from the current Social Security program to a savings program that will last and not require future taxpayers to pay in the extra $25 trillion. I wrote the President before the State of the Union address and expressed my hope that he would develop a program to keep Social Security solvent so we can take corrective action next year. I’ve offered my own bipartisan proposal in the Social Security Solvency Act (H.R. 3055).

Recognizing the importance of Social Security reform in his State of the Union speech is a beginning. I look forward to working with President Bush as the issue moves forward.