Imagine what America would look like in a few years if people had the opportunity to own their own home, their own job, their own education and their own personal retirement account. It’s not a pipe dream. It’s not only possible but urgent that we build an America where in our democratic capitalistic system everyone not only participates but is a shareholder.
On Monday, the chief actuary of the Social Security Administration confirmed the feasibility of every worker’s owning a substantial personal retirement account: He issued a favorable official analysis of a proposal put forth by personal accounts guru Peter Ferrara in a study published by a Dallas-based think tank, the Institute for Policy Innovation. In the IPI study, Ferrara advanced the idea of a large progressive personal-account option for Social Security. The proposal would allow all workers to contribute 5 percentage points of the 12.4 percent Social Security payroll tax to personal investment accounts. The proposal is also progressive, however, because on the first $10,000 of wages each year the allowable contribution would be doubled to 10 percentage points.
Benefits withdrawn from the accounts during retirement would substitute for a portion of promised Social Security benefits, and the government would guarantee all retirees no less retirement income than what Social Security currently promises them. Because private-market returns are so much higher than what noninvested, purely redistributive Social Security can offer, the accounts would finance substantially higher benefits after a lifetime of investment than what Social Security promises, let alone what it actually can pay.
According to SSA’s analysis, allowing workers to dedicate this substantial share of their payroll taxes to personal retirement accounts would ensure high enough returns so that no one would be worse off, and most workers would realize an increase in retirement income. Moreover, the chief actuary demonstrates that earmarking as much as 6.5 percent of payroll tax revenues for personal accounts would not endanger the Social Security trust funds or imperil the federal government’s fiscal situation; in fact, doing so would improve the outlook for both.
SSA’s official score shows that because so much of Social Security’s benefit obligations eventually are shifted to personal accounts, the long-term Social Security deficit is eliminated completely without benefit cuts or tax increases. And even though the proposal temporarily borrows money to pay some of the transition costs (i.e., those current benefits left uncovered when part of the payroll tax is dedicated to personal accounts), it also produces the largest-ever permanent reduction in government debt. Over time the system completely eliminates the $10.5 trillion unfunded liability of Social Security.
The short-term transition deficits, created by workers shifting just over half of total payroll taxes into the accounts, is covered by four factors: 1) the short-term Social Security surpluses until 2018; 2) the funds obtained by reducing the rate of growth of federal spending by 1 percentage point a year for just eight years; 3) the increased revenues that would result from higher corporate investment and earnings utilizing the increased savings in the accounts; and 4) the temporary sale of Social Security trust-fund bonds during the transition to cover any remaining annual net deficit.
With this transition financing, Social Security achieves permanent surplus by 2029, and then within the next 15 years, all of the trust-fund bonds can be completely paid off. The Social Security trust funds would never fall below $1.38 trillion, or 145 percent of one year’s expenditures, with the official standard of solvency being 100 percent.
As we just learned with Medicare, however, the devil will be in the details of getting such a program through the Congress. The devil in this case is a zero-sum mindset among many members of Congress from both parties who believe to their very core that Social Security reform is fundamentally about cutting future benefits for retirees and raising payroll taxes on workers.
The SSA report completely debunks this fallacy and demonstrates conclusively why it is unnecessary even to contemplate reducing future Social Security benefits or raising payroll taxes and why all the hand-wringing over borrowing money to finance the transition is misplaced. Indeed, through the personal accounts workers across the board would get higher benefits than Social Security now promises, and because the reform ultimately starts producing large trust-fund surpluses, workers eventually will pay lower payroll taxes.
Publication of the Social Security Administration report makes it official: We can create a shareholder democracy for the 21st century in which every working man and woman not only has a vote but also owns property, where each citizen can look forward not just to retirement security but retirement prosperity. A new, personal-accounts-based Social Security system that doesn’t skimp on how much of their payroll taxes workers can invest would promote individual wealth creation and ownership, and it would allow each American – especially women, the poor and minorities – to participate in America’s economic success.
Members of Congress, are you listening?