The Deal: The Case for Social Security Personal Accounts

The following is a speech delivered by FreedomWorks Director of Policy Max Pappas on March 16, 2005, at the Fund for American Studies. The event was hosted by the America’s Future Foundation. Joining Max on the pro-personal accounts side was Brooke Oberwetter of the Cato Institute. Dean Baker of the Center for Economic and Policy Research, and Ben Hubbard of the Center for American Progress presented the case against.

So the topic of tonight’s debate is Social Security reform and what I might mean to someone who is alive in 2042—they year they say the money-less trust fund will run out of money. As luck would have it, I’ll be 67 that year—the government-approved retirement age. I hope that at that point they’ll have … cured male pattern baldness, male pattern fatness, and that I’ll have a personal retirement account bulging with dough.

In the limited time I have, I’d like to make three points.

1. Solvency Is not enough
2. Ownership is Key
3. Size does matter

First, Solvency Is Not Enough

If solvency were the goal, we could achieve that through tax hikes and benefit cuts. This is how solvency has been maintained over the 70 years of Social Security. Taxes have been raised over 20 times— from a maximum tax of $60 to a maximum tax of $11,160. They could be raised again— and again and again and again— to keep the system solvent. And I agree with those who say it would only have to be a small increase in the near future to do so—but that’s what they said the last 20 times, and 20 small increases have resulted in 1 big increase. Solvency could also be achieved by cutting benefits— by, say, taxing benefits or raising the retirement age, which have been popular options in the past. Both of these options are solutions to the solvency problem— and also great ways to make Social Security an even worse deal for young workers.

Of course, solvency is important, and should be sought, but it is not enough. The fiscal problems facing Social Security are small compared to the culture of dependency the system creates. Reform that brings both solvency and provides us with enough savings that we own for our retirement so that we don’t have to go hat-in-hand to the government would be good reform.

Personal retirement accounts meet these two goals—and have the added bonus of providing better retirement benefits and treat women, minorities and low-income workers more fairly.

Second, Ownership is Key

As Jose Pinera, the architect of the Social Security reform in Chile that started 25 years ago, says, “There is no human dream stronger than the dream of having something to call your own.”

When we talk about Social Security reform through personal retirement accounts, we’re talking about a great new opportunity for every individual in the country to build and control their own retirement nest eggs. The math geeks have dominated the debate with talk about Social Security’s “solvency” and “transition costs” and “trust funds” and other accounting abstractions, making the topic about as appealing as eating last weeks left over Chinese food, green fuzz and all.

But the key to the Social Security debate is none of these. The key is ownership and offering a better way. The fundamental issue is who do we want to control the money that we pay into Social Security? Those opposed to personal retirement account not only want the federal government to control that money, but they want the federal government to force you to have the federal government control that money. Those in favor of personal retirement accounts are calling for a voluntary system of personal accounts where we can choose either to have the government control that money, as I guess Dean would choose, or to control that money ourselves—as I would choose.

People on both sides of the issue seem to dislike the fact that the surplus currently being collected by the Social Security tax is used to disguise the size of the federal deficit—a problem Al Gore famously proposed solving with a “lockbox.” Well, in a way, the idea of a lockbox is a good one. Not as he envisioned it, probably as a giant government owned steel box, maybe guarded by the Tennessee Valley Authority, with a CVS padlock that cost the Social Security Administration $600 thousand dollars—but rather as a situation where everyone had their own lock box into which they put their Social Security dollars. That’d make it hard for the government to spend. And that is what a personal retirement account would be—our own lock boxes.

Another key aspect to the idea of ownership, aside from keeping the grubby hands of Uncle Sam out, is that our accounts could be passed on to anyone we’d like. The way the current system is, an unmarried 60 year old who dies tomorrow, after paying the Social Security tax for 40 years, has nothing to show for it—nothing to give to his or her favorite charity, like America’s Future Foundation, or niece or nephew, or sister, or mother who may be in a nursing home having a hard time paying for prescription drugs. With personal accounts, this is not a problem—its your money and you can select how it is used.

Lastly, Size Does Matter.

The size of these accounts will determine just how important they will be. It’s disappointing to hear the administration talk about accounts that only allow workers to put in $1,000 a year while continuing to rely on Social Security checks for the rest.

It’s a mistake on policy and politics. It isn’t enough for anyone to rely on for their retirement, and it is the reason the administration is trapped in the benefit cut debate. Yes, if you are only allowed to put a little bit in an account, the government should still provide the rest—and together they may add up to more than is currently promised, but alone, the government part will have to be cut.

It doesn’t have to be this way.

Large accounts—by which I mean ones where you can put in about 6 percent of your income—which is the half of your income you see going to Social Security out of your paycheck. Large accounts would provide more money than Social Security is offering and would free us from having to knee-bend or curtsy to our Congressman as we beg them for our Social Security check. Bills like this have been introduced—and I’d be glad to offer details on them in the Q&A. They’ve also been checked out by the Chief Actuary of the Social Security Administration and deemed to bring permanent solvency to the system. Small accounts don’t.

We should be allowed to put the 6 percent of our money that comes out of our paychecks into these accounts—voluntarily, if we feel like being crazy and risky, and want to invest our money in sound, well diversified portfolios of bonds and stocks, just like they do in the Thrift Savings Plan, to which every single employee of the federal government has access, or like seniors can do through AARP, the same AARP who in papers across the country told America that investing was like gambling while AARP Services, Inc., the lucrative business arm of the AARP, enjoyed the large profits it reaps from its deal with Scudder Investments to sell 38 different mutual funds to its members as part of a special affinity program. Scudder pays AARP an annual fee for the use of its trademark that ranges from .05 percent to .07 percent of assets. That can come to a lot of money. One fund alone, Scudder Growth & Income AARP, manages $5 billion.

But I’m glad AARP, and the Thrift Savings Plan are offering such good services to those who have access to their clubs.

I just wish we could get them to agree to let the rest of America invest as wisely.