PRAs Arrive in Congress

The voices that whisper in the corridors of power are saying Congressmen are considering and preparing bills that would allow Americans to save for their retirement with personal retirement accounts (PRAs)—accounts that we would own, that we could pass on to our children, and that politicians could not take away. At first glance this is very exciting for those of us who understand the benefits of personal accounts. But before we get too excited, we need to look to CSE’s core Social Security reform principles, and look for plans that:

• Guarantee promised benefits for the currently retired and nearly retired

• Do not increase taxes

• Allow workers to invest a portion of their Social Security taxes in personal retirement accounts

• Ensure that workers would own their own accounts—not the government

Last week, when CSE members from around the country came to Washington, D.C. for the Liberty Summit, which included a day of meetings between members and their congressional representatives, the Florida group was given details of a plan their representative, E. Clay Shaw, Jr., introduced in January. Rep. Shaw is a powerful and valuable ally. He realizes Social Security must be reformed, that the “traditional” approach of increasing taxes and cutting benefits is unacceptable, and that individuals should own their own accounts.

His Social Security Guarantee Plus Plan (HR 75) guarantees promised benefits, does not increase taxes, and allows workers to own personal accounts, but not with a portion of their Social Security taxes. Instead, “workers voluntarily elect an annual refundable income tax credit equal to 4% of wages up to $1,000, to be deposited in their own Guarantee Account.” Although there are many good parts to this plan, it would be much stronger if the money from the personal accounts came from Social Security tax dollars, and if workers were allowed to put in considerably more than $1,000 per year. The average worker pays $4,000-$5,000 per year in payroll tax.

On September 10, Congressman Nick Smith (R-Mich.), a long-time supporter of sound Social Security reform, introduced the Retirement Security Act (HR 3055), along with a strong coalition of supporters, including the Alliance for Worker Retirement Security, the Club for Growth, and 60 Plus.

Smith’s plan does not increase taxes, it does not cut benefits for those in or near retirement and it allows workers, on a voluntary basis, to fund personal accounts with their payroll taxes. Workers would own the money in their accounts and be allowed to invest it in one of several funds with varying stock/bond ratios. His plan includes other attractive features, like increasing contribution limits for IRAs and 401(k)s.

Workers would be allowed to contribute 2.5 percent of income, which would increase to 8 percent by 2075. The low initial contribution limit is most likely a way to appease those concerned about the “transition cost” of moving to personally owned accounts. While this is a concern that needs to be addressed, low contribution limits makes it very difficult for low-income workers to save enough to free themselves from a government-funded retirement, and seriously reduces the money all workers will have at retirement. A worker earning $20,000 and saving 2.5 percent accumulates just $500 per year, while 10 percent brings in $2,000 per year. A worker earning $50,000 saves $1,250 per year at 2.5 percent, but $5,000 at 10 percent Allowing individuals to save more of their payroll tax dollars from the start would make this good plan much stronger.

Another long-time supporter and friend of personal accounts, Rep. Jim DeMint (R-S.C.), is also preparing a bill that would allow us to own our retirement. DeMint’s plan guarantees promised benefits without increasing payroll taxes, while allowing workers to save a portion of their payroll taxes in personal retirement accounts that they would own.

The DeMint plan offers a new twist—those with the lowest incomes are able to put the highest percent of their Social Security taxes into a personal retirement account. It’s a sliding scale, starting with those making under $15,629, who save 8 percent, gradually decreasing to those making over $87,000, who can save 3 percent. DeMint, by offering larger accounts than the other plans, allows for more money to have been saved by retirement, making it less likely that any government assistance will be needed. Still, shifting the top of the scale from 8 percent to 12.4 percent and the bottom from 3 percent to as close to 12.4 percent as possible would make for an even more prosperous retirement for Americans.

Of course, more initial savings would mean more initial transition financing, but the DeMint plan includes a way to more than finance itself—leaving plenty of room to increase initial savings allowances. DeMint’s transition will cost an estimated $444 billion—but after that, having created a nation of savers and owners through personal accounts, Social Security will cost tax payers nothing. $444 billion is a drop in the bucket when you consider that Social Security will own an unfunded liability of $26.1 trillion over the next 75 years if the system isn’t changed.

DeMint finances the 10-year transition by freezing non-defense discretionary and non-homeland security government spending for one year, then increasing government spending at half the rate of inflation for two years, then matching the rate of inflation for the remaining seven years. This would save taxpayers $817 billion from 2004-2013— $373 billion more than is needed to finance DeMint’s plan. Extra money that should be used to increase initial savings rates.

DeMint’s proposed spending restraint, surprisingly, is well within the proven ability of our politicians in Washington. In 1981 the Democrat-controlled House approved a budget reducing non-defense spending by $226 billion over three years. In 1995, the House-Senate Budget Agreement called for reducing mandatory spending by $332 billion over five years. A year later the Senate Budget Agreement called for reducing mandatory spending by $244 billion over five years.

Slowing government spending is a good idea in its own right, but when done to help us get personal retirement accounts, it is righteous.

If more money is needed for the transition, there’s always the $125 billion-plus the government spends each year on corporate welfare.

It is great news that the Social Security debate has progressed to the point where personal accounts are part of several plans brewing in Congress. To have the three congressmen mentioned above, and others like Charles Stenholm, Jim Kolbe and Pat Toomey so committed to personal accounts that they are pushing legislation that may make personal retirement accounts happen bodes well for America. Karl Marx will roll in his grave as the workers of the world unite and take control of the means of production—through personal retirement accounts invested in stocks and bonds.