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This piece was originally published at Tech Central Station.
Recently I wrote a column for this publication contrasting the different approaches to Social Security reform taken by the New York Times and the Washington Post editorial boards; differences that have now put these two media titans on opposite sides of an increasingly heated issue. It was during the presidential campaign that the Washington Post dared to stake out this new territory by challenging firmly entrenched assumptions and seriously considering alternatives to the current demographic train wreck that is the Social Security system.
For example, on August 14th, 2004, the Post editorialized that, "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." The Post also discarded the class-warfare mantra that has consumed Democratic candidates and party loyalists for so long by reasoning that: "Privatization could also stimulate economic growth, boosting tax revenues and so strengthening the nation's fiscal prospects via a second route." They continued, "Private accounts would boost national savings" thus "savings would become more plentiful," which, in turn, would "stimulate extra corporate investment and growth."
The Washington Post editorial writers realize that Social Security, as it currently stands, is the "risky scheme." The government can at any time raise taxes or cut benefits. Moreover, workers born after 1960 are expected to receive a real rate of return on their payroll-tax contributions of less than two percent. Alan Greenspan stated this in 1999; his estimate likely was generous. This measly return is not a fair deal for retirees -- today or in the future -- and is particularly bad for low-income people of color. Even workers who put their money in standard government-insured savings accounts will earn higher returns than the current Social Security system can provide.
The Washington Post has now followed up on that original piece with an even more promising editorial this week. This week's piece entitled, "The Cost of Reform," observed that creating personal retirement accounts without tax increases or benefit cuts would require "issuing perhaps $2 trillion in extra bonds over the next generation or so," but added that the creation of these accounts "would generate an equal and opposing transition benefit" thus "the net transition cost should be zero." Ditto for the effect on interest rates and the dollar. As the editorial makes perfectly clear, "Government borrowing would increase, but private saving would increase equally." In other words, net national savings would not suffer. In fact, net national savings can be expected to increase, especially if personal accounts are accompanied by tax reforms.
But that is not all, the editorial writers astutely observe that in the real world, politicians will be more inclined to support cuts in promised benefits by increasing the retirement age, by adjusting the formula for calculating benefits (from wage indexing to price indexing), or by raising taxes to fund the transition because, "It's easier to wiggle out of promises to retirees?than it is to renege on bond payments?"
The Post concludes by stating that reformers "have to make the case that these costs, as well as the risks that privatization might pose to a system that protects the vulnerable members of society, are justified by the benefits that private accounts could bring."
In my opinion, the president should go to the American people, as Ronald Reagan did, and expand on his vision of creating an ownership society and explain that democratizing our capitalistic system for workers and low income people will do for this nation today what Lincoln's Homestead Act did in 19th century America. He could tell them the U.S. economy is in excellent shape, and with the correct policies in place it will remain so into the foreseeable future. However, he should also explain that we do have a problem with our national retirement system: Social Security has a large unfunded liability -- $12 trillion in present-value terms -- but the solution is not to raise taxes or cut benefits or force people to work longer. The answer is to refinance our unfunded liability, just as any corporation in the same situation would do and shore up the system by allowing workers to pre-fund their own retirement through personal accounts they own and control.
That's what we've got to do with Social Security. We've got to refinance the unfunded commitment we have made to current workers and retirees, and we've got to put in place personal retirement accounts of sufficient size so that workers can pre-fund their own retirement. Part of the refinancing could come from earmarking for personal accounts budget savings achieved from modest restraints in the overall growth in other federal spending; part from revenue increases expected from higher economic growth produced by transforming the current pay-as-you go benefits program into a fully funded private-investment retirement plan; part from surplus Social Security payroll tax revenues are available (payroll tax surpluses will average about $75 billion a year -- or about 1.7 percent of payroll -- for the next decade or so); and the rest from simply depositing into the accounts newly issued, long-term, Treasury Inflation Protected Securities (TIPS) backed by the full faith and credit of the United States Government with no restrictions on their resale in secondary bond markets.
The Washington Post editorial page puts it this way: "The prospect of an extra $2 trillion in bond issuance sounds scary. . .[but] these concerns miss the fact that the increased government bond issuance would be countered by the new pool of capital accumulating in private retirement accounts." I couldn't have said it better myself!
Jack Kemp is the co-chairman of FreedomWorks.