The Ryan-Sununu Plan to Overhaul Social Security

The Washington Post recently editorialized on the desirability of reforming Social Security via personal retirement accounts that workers own and control. The scuttlebutt around Washington at the time was that the Post’s virtual endorsement of personal accounts could pave the way for Sen. John Kerry to scrap the mindless mantra – “I will never privatize Social Security” – he had been using to dodge saying how he would modernize Social Security and prevent its bankruptcy.

Since then, alas, Kerry has only hardened his opposition to personal accounts, leading President Bush to accuse him of once again playing the Social Security card, attempting to scare the elderly.

“You’ll hear the same rhetoric (from Kerry) you hear every campaign,” Bush said. “It is the tired, pathetic way to campaign for the presidency.”

I am not surprised that Kerry’s risk-adverse advisers from the Brookings Institution, who want to “fix” Social Security by cutting benefits and raising taxes, have probably convinced him the transition costs to personal accounts would explode the deficit. I can imagine that his economic advisers – bean counters right out of the Herbert Hoover school of economic austerity for whom it’s deficits uber alles – have imprisoned Kerry in their own cramped and pinched view of the way the world works economically. However, Kerry needs to follow the Post’s lead and free himself of men and women of little vision, reaching out instead to economic advisers who share John F. Kennedy’s insight that temporary deficits are sometimes necessary to finance policy overhauls that lead to higher long-term growth and greater revenues.

The Post said, “Mr. Bush’s sympathizers are right that Social Security privatization could reduce long-term deficits and right that the nation should not be deterred by the transition costs.” Personal accounts, the Post went on, “would unlock a new source of money to finance Social Security.” Sounding like Ronald Reagan, the Post editorial writers reasoned: “Privatization could also stimulate economic growth, boosting tax revenues and so strengthening the nation’s fiscal prospects via a second route.” The editorialist observed, “Private accounts would boost national savings” so that “savings would become more plentiful,” which, in turn, would “stimulate extra corporate investment and growth.”

The Chief Actuary of Social Security has confirmed these conclusions, demonstrating that neither tax increases nor benefit cuts nor increases in the retirement age are necessary with large personal retirement accounts if a reasonable transition-financing plan is in place. One such plan has been proposed by Rep. Paul Ryan, R-Wis., and Sen. John Sununu, R-NH). Their proposal would allow workers to devote approximately half the payroll tax to personal accounts and finance the transition by four means.

First, they stop the raid on Social Security and rather than continuing to spend Social Security surpluses (expected to equal $1.75 trillion between now and 2018) on other government programs, they would devote all the surpluses to help cover the shortfall in Social Security revenues when workers are allowed to redirect about half the payroll tax away from paying current benefits into personal accounts.

Second, Ryan and Sununu propose mild federal spending-growth restraint for the rest of the federal government that would lower the annual rate of expected federal spending growth about 1 percentage point beneath its currently projected path (from 4.7 percent to 3.7 percent) for eight years.

Third, based on the research of Harvard economist Martin Feldstein, the former head of the President’s Council of Economic Advisers, Ryan and Sununu count on higher general revenues resulting as a consequence of higher national saving and faster economic growth produced by the reform. This assumption is perfectly reasonable since, according to Feldstein, “the combination of improved labor-market incentives and the higher real return on saving (from large personal accounts) has a net present value gain of more than $15 trillion, an amount equivalent to 3 percent of each future year’s GDP forever.” This increase in output compares positively to an infinite-horizon, present-value unfunded Social Security liability of $13 trillion as calculated by Social Security Trustee Thomas Saving.

Fourth, Ryan and Sununu embrace some additional federal borrowing as a rational and reasonable financing arrangement to permit workers to redirect half the payroll tax into personal accounts and pre-fund their own retirement. As FreedomWorks chief economist Lawrence Hunter points out in a recent study for the Institute for Policy Innovation, under the Ryan/Sununu plan, “public debt, including accrued interest, rises by a total of $1.82 trillion (constant 2003 dollars) with large personal accounts, but the reform plan produces enough surpluses after 2028 to pay off all those bonds within the following 15 years, leaving the net impact on debt held by the public at zero over the 40-year time horizon. … At no time would annual deficits exceed 1.5 percent of GDP, and they would average less than 1 percent most of the time.”

It’s time Kerry stopped the scare tactics on Social Security. It’s time he stopped telling voters what he won’t do about Social Security and begins telling them precisely how he intends to modernize it and save it from bankruptcy.