10 Reasons Why Personal Retirement Accounts SAVE Social Security
“The mission of the Alliance for Retired Americans is to ensure social and economic justice and full civil rights for all citizens so that they may enjoy lives of dignity, personal and family fulfillment and security.” The ARA claims a membership in excess of 3 million members, all devoted to saving social security and economic equality. While noble, ARA’s future success comes into question when one looks at where ARA stands on the issue of Social Security. Like the AARP, the Citizens for Tax Justice, and the Center for Budget and Policy Priorities, ARA staunchly opposes personal retirement accounts. The organization posted its “10 Reasons Why Privatization Destroys Social Security,” which are readily debunked by the facts.
CLAIM #1: [Personal accounts drain] trillions of dollars from the Social Security Trust Fund to risky private retirement accounts.
THE TRUTH: There is little risk in personal retirement accounts. A recent study done by the CATO Institute has shown that there has been no 20 year period where that has been a loss in the market. In fact, the 3.36% rate of return on investments in the period between 1929-1948 is still much greater than the rate of return retirees receive currently on Social Security. And with future retirees facing a negative rate of return, the current Social Security system is much riskier than market investments. Besides, money will not simply disappear from the Social Security Trust Fund during the transition to private accounts. Transition deficits over the next twenty-four years would average $52 billion/year. New public debt, interest included, would rise by a total of $1.83 trillion, which actually reduces the debt’s share of the GDP from 38% to 29%. After 2028 surpluses would be produced to pay off all new borrowing over the next fifteen years, leaving the net impact on the public debt at zero in less than 40 years. All this information and more can be found at www.ipi.org, under Larry Hunter’s policy paper titled, “Reducing Government Consumption, Increasing Personal Wealth.”*
CLAIM #2: [Personal accounts cost] more- not less- than preserving traditional Social Security.
THE TRUTH: Regardless of how we fix Social Security it will cost about $10.4 trillion. The only difference is that bailing out Social Security only bandages the problem, while personal accounts actually turn a sizable profit for Social Security recipients while eliminating the unfunded Social Security liability.
CLAIM #3: [Personal accounts result] in huge Social Security benefit cuts for retirees, disables workers, and survivors.
THE TRUTH: There is at least one bill in front of Congress right now that creates personal retirement accounts while leaving promised Social Security benefits in tact. Personal accounts do not possess some shadowy magic that will hack away at benefits; in fact, a companion bill introduced in the House by Congressman Ryan and Senate by Senator Sununu would leave Social Security completely intact while curbing wasteful federal spending.**
CLAIM #4: [Personal accounts explode] the national debt and [create] new debt.
THE TRUTH: Personal accounts would increase the public debt by a total of $1.82 trillion (in constant 2003 dollars, accounting for interest). However, surpluses created after 2028 would pay off all those bonds within 15 years, leaving net impact on the debt held by the public at zero after 40 years. Comparatively, with the current Social Security system in place, by 2074 public debt would equal 300% of the GDP. With private accounts public debt would, at that point, be near -100%. Yes, negative.
CLAIM #5: Active workers have little to gain… alleged benefits won’t be felt until after everyone paying into the system today is dead.
THE TRUTH: Alan Greenspan and countless other economists have stated that workers born in the 1960s will get a return of 2% on their Social Security investment, while workers born in the 1980s have a good chance of seeing a negative return on their investment. Personal accounts would change this significantly. For instance, a two-earner couple where the husband and wife are both 40 today earning a combined $70,000 (consistent with U.S. Census Bureau data regarding couples), gaining average salary increases each year, would end up with an account in excess of $650,000. This could be considerably higher if the account is strictly invested in stocks instead of a combination of stocks and bonds, and is 60% more than what Social Security promises but cannot pay. What about low income workers? With a combination of stocks and bonds, the low income worker could retire with an account worth in excess of $270,000, again considerably higher if invested solely in stocks, with monthly benefits in excess of $2100 compared to current Social Security monthly benefits of approximately $1170.
CLAIM #6: [Personal accounts create] an immediate financial crisis for Social Security that did not previously exist.
THE TRUTH: This is simply untrue. We have already dealt with how accounts can only benefit workers, and Social Security benefits will be guaranteed to those too old to benefit from private accounts. Accruing public debt is not a dirty action so long as there is a simple and coordinated plan to pay it off, which private accounts and the Ryan/Sununu bill clearly have.
CLAIM #7: [Personal accounts] will hurt generations of Americans by substantially reducing benefits to future retirees.
THE TRUTH: Again, benefit reductions must be enacted in Congress, and at least one bill that would create personal retirement accounts is in circulation that would leave benefits as they are.
CLAIM #8: [Personal accounts create a] financial hole that must be filled by slashing benefits, providing large financial transfers from the rest of the government or both.
THE TRUTH: We have already looked at the “financial hole” that personal accounts create (and then promptly fill), and we have already discussed that benefit cuts are not built in to the personal account concept. The real financial hole exists in the current Social Security system. We can have a 30% benefit cut, a 60% tax increase, or take a debt increase equal to 300% of GDP required to maintain Social Security as it stands. We can and must do better.
CLAIM #9: Every American taxpayer will subsidize those electing to invest in private accounts.
THE TRUTH: There is no subsidization, and there can be no subsidization; how can one person subsidize another’s personal account? It can’t be done! The entire point of the system is to give individual control and flexibility to the individual over his or her Social Security monies. And, in the extremely unlikely event that an individual loses on his investment, the federal government will pay out benefits that meet the current level promised to retirees. Since the individual was investing with his personal payroll taxes (in a select group of government approved funds, similar to a 401[k]), the government would only be covering his or her loss, which is the difference between currently promised benefits and the amount the individual owns in his personal retirement account. Other individuals would not be affected.
CLAIM #10: The one source of guaranteed, life-long benefits will disappear.
THE TRUTH: The only way to guarantee that benefits will disappear is to leave Social Security the way it is. The only way to guarantee a worthwhile return on Social Security is to invest in personal accounts. The risks are minute, even after factoring in the occasional economic downturn. The real risk comes with pretending that the current system is OK and can be fixed, that essentially there is no problem.
*Larry Hunter’s IPI piece goes into greater detail regarding the hard facts and research behind the numbers.
**All of the facts and numbers mentioned in this piece were taken from and reflective of the Ryan/Sununu Bill to create personal Social Security accounts.
The ten points were taken from the Alliance for Retired Americans’ website. They can be found here.
Graham Gawrysiak is a FreedomWorks intern. He can be reached at ggawrysiak@empower.org.
