Social Security, the largest government program in the world, is finally getting the attention it deserves. The inherent contradictions that would eventually leave the program bankrupt have been known about for years, but have for so long been swept under the rug by politicians too afraid to touch the so-called “third rail” of politics. Those days are over as the president and many members of Congress continue to shine the spotlight on Social Security, exposing the danger and problems of requiring Americans to rely on a pyramid scheme for their retirement. Personal retirement accounts would fundamentally change the system from one that is unfunded to one that is pre-funded—a change akin to that taking place across corporate America as companies change from defined benefit programs they cannot fund to defined contribution programs that workers fund as they work.
To understand what is wrong with Social Security, we have to first understand exactly how Social Security is structured—because the problem with Social Security is its very structure, not simply a temporary future shortfall of money that can be permanently solved with more tax dollars.
Social Security is a pay-as-you-go system, which means that the Social Security taxes collected today immediately go out to pay benefits to those who are currently retired. The money is not set aside anywhere with anyone’s name on it.
In fact, the Supreme Court decided in 1960, in a case called Fleming v. Nestor, that we have no legal right to our Social Security dollars. The court decided that “To engraft upon the Social Security system a concept of ‘accrued property rights’ would deprive it of the flexibility … it demands.” This is Washington-speak for, if we owned it, the government would have a hard time taking it away.
So today’s workers have to hope that the next generation of workers will continue to pay increasing amounts of taxes to support their retirement, and so on and so on.
This worked fine when there were a lot of workers supporting each retiree. In 1950, for example, there were 16 workers supporting each retired person. Today there are about three workers supporting each retiree, and soon there will be just two workers per retiree.
To put this in dollar terms, in 1950, for one retiree to receive $1,000 a month, each worker had to contribute just $62.50 a month. Today, the three workers supporting each retiree each have to contribute $333 a month for that retiree to receive $1,000. And when there are just two workers per retiree, each worker will have to pay $500 in Social Security taxes per month for one retiree to receive $1,000.
This is why there is a crisis and something needs to be done. Those opposed to reform have wasted a lot of time arguing that there is no crisis. They insist, instead, that it’s just a really big problem. Even if we accept that it is a problem and not a crisis, the fact remains that there are fewer and fewer workers contributing to the system and more and more people receiving benefits.
And the longer we put off doing something about it, the worse it is going to get. With every dollar a person pays in Social Security taxes, that is one more dollar the government is going to have to collect in the future to pay him when he retires.
On the other hand, for every dollar a person is allowed to put into a personal retirement account, that is one less dollar the government is going to owe him when he retires, so one less dollar they’ll have to take from the next generation.
In fact, if in 1983, the last time they made major changes to Social Security, they had allowed workers to put about 6 percent of their income into personal accounts, Social Security would have reached permanent solvency 4 years from now. Instead, it is going to start running permanent deficits in just 13 years. So there’s clearly a problem with Social Security as we know it.
President Bush isn’t the first to notice this. President Clinton, in the mid-90s, acknowledged Social Security’s inherent flaws. Some may recall that the rallying cry of the Democrats at the time, in response to proposed tax cuts, was “Save Social Security First.” Many of the same people today are saying there is no problem, no “saving” needed. President Clinton accepted there was a problem and said there are three ways to deal with it:
Get higher rates of return through market investment
He was right. Raising taxes would temporarily solve the problem. But this has already been done 20 times. When Roosevelt began the system in 1935, the Social Security tax was 2 percent on your first $3,000 dollars—that’s a maximum Social Security tax of just $60 a year. After 20 tax increases to “fix” the problem it is now 12.4 percent on your first $90,000—a maximum of $11,160 a year, or a $11,100 tax increase.
There are plenty calling for fixing the current problem by raising taxes one more time. This would fix the problem—until it won’t and taxes need to be raised one more time.
The problem could also be dealt with by cutting benefits. Some readers may remember when the government supposedly fixed the Social Security problem in the early 80s. One of the solutions was to start taxing Social Security checks—that is a benefit cut, more for the government, less for us. They also decided to raise the retirement age—that is also a benefit cut. If you are going to live to 85 and they raise the retirement age from 65 to 67, that is 24 months of checks they are taking away that had already promised. That is less for you and more for the government.
And these are the two options guys like Senate Minority Leader Harry Reid and the AARP are talking about when they say they system just needs to be “tweaked” or “a few moderate changes” will solve the problem. Sure, raising the Social Security tax from 12.4 percent to say 14 percent may be a moderate change that would help for now—but it is not a moderate change when it has already been done 20 times and increased the tax from $60 to $11,160. And it will not be a moderate change when they have to keep raising the tax until it eventually hits 20 percent of our income—which the Social Security Administration says is the amount that will have to be taken in the foreseeable future to simply pay already promised benefits.
That brings us to option three, personal retirement accounts, which is what President Bush is proposing. This is a proposal to begin pre-funding retirement by allowing us to keep some of the Social Security tax dollars we are already paying in an account we own and control.
Personal Retirement Accounts would allow every American the chance to build a nest egg for retirement, and have ownership in our society. It would break down the old division between labor and capital by making every worker an owner. The workers, as Karl Marx had hoped, would own the means of production.
We keep hearing about the president’s “plan” but all we really have are some general principles he has said he’d like to follow. A few bills have been introduced on Capitol Hill, but none is specifically being pushed by leadership at this time. Some are better than others, but all the good bills do have several things in common that will probably be part of any bill the president signs, as they are consistent with the principles he’s proposed.
One is that personal retirement accounts would be voluntary. Workers under 55—because those over 55 would see no change in the program—would simply be allowed to opt into the personal accounts. Every worker would have the choice of where he or she wanted his or her payroll taxes to go when they were taken out of each paycheck—either into a personal retirement account, probably administered by the Social Security Administration, or to be spent as they are now. Those not interested in personal accounts would be free to continue under the current system.
Because this money is coming from Social Security taxes already being paid, no one would need to come up with new money to fund his accounts. Most who can afford to do so already are, in the form of an IRA or a 401(k). This is particularly important for lower income workers who may not have extra money to fund an extra account, like the add-on accounts some out-of-touch politicians are proposing. Personal retirement accounts would give every worker in the country access to the same powerful savings vehicle of investing that those who can already afford it have. It would be the democratization of investing.
Another common feature is that the money would only be allowed to go into an approved, well-diversified fund of bonds and stocks. No one would be able to put all his money in Enron, for example, or on red at the roulette wheel in Vegas, as Harry Reid, the Democrat leader of the Senate suggested. Of course, he represents Las Vegas, so maybe he was hoping we would. Age-appropriate guidelines would be provided—for example, older workers would be advised to protect themselves by having more money in bonds as they neared retirement. And there would most likely be an “automatic option” that would automatically shift a worker’s funds into the mix most age-appropriate.
And, of course, these accounts would be owned by each worker so they could be passed on when the owner passed away. This cannot be done under the current system where when a worker dies at 65, for example, after paying into the system for 45 years, he basically gets nothing for his 45 years of being an honest, hard-working, taxpaying citizen.
These conservative, diversified funds would be similar to the ones available in the Thrift Savings Plan (TSP)—the retirement savings option available to every single federal employee in the United States from our postman to our congressman. TSP offers federal workers the choice of five funds from which to choose. TSP.gov has information on how these accounts have performed over the years. According to that site, the five funds have returned 5.45, 5.75, 7.72, 11.84 and 11.99 percent over the past 10 years. Social Security will most likely offer returns between negative 1 and 1 percent for many of those who will retire in the years after Social Security begins to run a deficit.
The government gets to keep the workers’ contributions—which, of course, is why so few in the government are interested in changing the system. Not only would they lose out on this money, but they would also lose control over our retirements, which we would be put in control of if we were allowed to own our Social Security tax dollars.
Personal retirement accounts that we own and control would mean the end of the days when every senior has to go hat-in-hand to the government for his Social Security check. The government, instead, would have to come to us—and I think we’d all turn the tables and tell them we’d rather keep more for us and less for the government.
By Max Pappas, Policy Director, FreedomWorks (http://www.freedomworks.com/)