The Heat is On: Taxpayers Want Private Retirement Accounts

Social Security – once an issue politicians addressed only at their own peril – is getting the media and public attention it deserves. Americans are appropriately concerned about this “payroll tax” and are ready to address meaningful and necessary changes in the system.

For Americans who lived through the Great Depression, a time when Americans trusted the government more than they trusted banks, Social Security was a security blanket that they relied on to protect them in their retirement.

Americans today have a different opinion. Poll after poll indicates they don’t believe there will be a trust fund to provide for them when their turn comes. And citizens don’t have the same trust in government.

Why the change? Americans understand that Social Security will begin running substantial cash deficits in just 15 years as the system will be spending more on benefits than it collects in payroll taxes. Over the next 75 years, those deficits will total a whopping $22 trillion, adjusting for inflation.

They also realize that there is no trust fund. The IOU’s that the government issues every year to the Social Security “Trust Fund” will require the government to hike taxes by 16 percent or borrow $11.3 trillion to bail out the system between 2015 and 2037.

However, the worst crisis facing Social Security today is a personal one. According to most studies, a typical 35 year-old working couple will earn less than a 1.5 percent return on a lifetime of paying Social Security taxes.

That is why for the first time since Social Security’s inception, we are having a legitimate political debate over its future, and over the future of millions of Americans’ retirement.

Both major presidential candidates have entered the fray with competing proposals.

Gov. George W. Bush’s plan allows for workers to divert a portion of their Social Security taxes into a Personal Retirement Account that they own and control, improving the return they get from their contributions.

Vice President Al Gore has proposed using general tax revenues to subsidize individual retirement accounts for low and middle-income workers. His new accounts are in addition to the existing system, rather than “carved out” of it,” like the Bush plan.

To evaluate these plans, we can compare them with a successful but little-known privatized alternative to Social Security.

Until the early 1980s, county governments were allowed to opt out of the Social Security system by providing an alternative retirement plan for their employees. Three Texas counties took this option, including Galveston County.

The plan set up by Galveston creates “retirement annuity accounts,” to which employees contribute 6.13 percent of their salary, while the county contributes approximately 7 percent. The plan is managed by a financial services company.

To ease concerns of market risk, the required contributions are all invested in a vehicle with a fixed return, which has averaged 8.64 percent since the plan’s inception. Additional contributions may be made and invested in higher yielding stock funds, provided total contributions do not exceed 25 percent of gross pay or $8000 per year.

Almost 20 years after implementation, Galveston County employees are fairing very well under this plan.

An employee retiring at age 65 who has accrued assets $320,000 would receive a monthly payment ranging from $2076 to $2494. Compare this to a similarly situated Social Security recipient, who’s monthly check would be $1077.

Ray Holbrook, an employee who helped set up the plan, said that after 14 years in the alternative plan and 27 years in Social Security, his monthly payments out of each are about the same.

How do the Bush and Gore plans hold up to this home-cooked example?

Like the Galveston plan, Bush seeks to increase returns and reduce the long-term liability of the system by pre-funding the retirement costs of tomorrow’s retirees. Because taxpayers would be putting their own money in privately controlled accounts to accomplish this, the transition costs to a privatized system would actually be less than the unfunded liabilities we face today.

But Gore’s plan, which requires people to continue to pay the 12.4 percent payroll tax plus an additional 2 or 3 percent of their income (financed through tax revenue) to fund his new accounts, does nothing to address the problems of low returns or the unfunded liabilities of the Social Security system.

A system of privately funded retirement accounts will give workers the opportunity to get higher returns, to gain personal control over their retirement security and to build a nest egg they can pass on to their children, while reducing the long-term liabilities we face today. This is what the voters are seeking. The heat is on the candidates to provide Americans with meaningful and lasting Social Security reform.