In his State of the Union address, President Bush stated his strong support for a personal account option for Social Security. “Younger workers,” he said, “should have the opportunity to build a nest egg by saving part of their Social Security taxes in a personal retirement account.” The President will raise this issue in his campaign. He wants this historic reform to be part of his legacy, and a broad coalition of conservatives is forming to support him on it. Still, many reformers were discouraged that he didn’t say more. Reports before the speech indicated he would make it a bigger part of his presentation. Based on what I have heard, the speech did originally highlight Social Security personal accounts much more, with a major theme of building an ownership society. But Republicans on the Hill, still scared of the issue, implored the President to cut it back, and spare them from having to deal with Social Security in this election. They still fail to recognize the importance of this proposal. For conservatives, this can be one of the most important reforms of the last hundred years. A new coalition of 25 major conservative leaders recognizes precisely that. Largest Tax Cut in History Just what this initiative can involve was demonstrated in a proposal I recently developed for the Institute for Policy Innovation. The Chief Actuary of Social Security has now officially scored the proposal. Its main components are:
- Out of the 12.4% Social Security tax, workers could choose to shift to personally owned, individual accounts, 10 percentage points on the first $10,000 in wages (or $1,000) each year, and 5 percentage points on all wages above that, to the maximum Social Security taxable income ($87,000 this year).
- Benefits payable from the tax-free accounts would substitute for a portion of Social Security benefits based on the degree to which workers exercised the account option over their careers.
- Workers would pick a fund managed by a major private investment firm from a list officially approved for this purpose and regulated for safety and soundness, similar to the system adopted in Chile 25 years ago, and to the operation of the Federal Employee Thrift Retirement System.
- The personal accounts would be backed up by a federal guarantee that workers with personal accounts would receive at least as much as promised by Social Security under current law.
- There would be no change in currently promised Social Security benefits of any sort, for those retired today or in the future. Survivors and disability benefits would continue as under the current system without change.
The official scoring of this proposal by the Chief Actuary of Social Security showed the following:
- The reform plan achieves full solvency in Social Security by 2029, with permanent and growing surpluses thereafter, all without any benefit cuts or tax increases.
- Indeed, the Chief Actuary actually calculated that the permanent surpluses in Social Security thereafter would be so large that the payroll tax rate could be reduced from 12.4% down to 3.5%, with 6.4 percentage points on average going instead into the accounts. Under the current unreformed system, the Chief Actuary has scored that under intermediate assumptions the payroll tax rate would have to rise to over 20%.
Bottom line: The plan involves the largest tax cut in world history. At the same time, the accounts in the plan are large enough that at standard market investment returns they would provide workers across the board with higher benefits than Social Security promises, let alone what it can pay. The study I did for the Institute for Policy Innovation shows that with the accounts invested half in stocks and half in bonds, workers at all income levels would enjoy about 60% more from the accounts than from the Social Security as it is. With a higher proportion invested in stocks, the benefits would be even higher. The reform would actually solve the financing crisis while cutting taxes and increasing benefits. That should not be a surprise. That is what happened in Chile as well. This results because the accounts produce a large increase in national wealth and income, through increased savings and investment, and lower taxes. In addition, the Chief Actuary estimated under the reform plan that the personal wealth of working people would be increased by over $7 trillion in present value dollars through the accounts. Moreover, in the process of shifting reliance to the personal accounts, the unfunded liability of Social Security, currently estimated at $10.5 trillion, would be eliminated. This is three times the current reported national debt. With workers shifting a major portion of the payroll tax to personal accounts, transition financing is needed to cover Social Security benefit obligations to seniors while the new accounts are phasing in. The Chief Actuary of Social Security scored the following four transition financing mechanisms as sufficient to cover this transition-financing burden.
1. Devote the short-term Social Security surpluses projected until 2018 to the reform plan. 2. Reduce the rate of growth of federal spending by one percentage point each year for eight years, with the savings devoted to the reform plan. In this case, the proposal would provide a vehicle for beginning to get runaway federal spending under control. 3. The reform produces increased corporate tax revenues due to new corporate income resulting from corporate investment of the growing personal account savings. These funds would also be devoted to financing the transition. 4. To the extent needed each year, excess Social Security trust fund bonds would be sold to the public with the funds used to ensure payment of full Social Security benefits. This is what those trust fund bonds are for. Under the current system, those bonds are just going to be redeemed for cash from the federal government anyway after 2018, until the trust fund is exhausted in 2042.
After Social Security achieves solvency, the surpluses produced by the reform are sufficient to pay off this debt sold by the public within the next 15 years. So the net effect of the reform on debt held by the public is zero. With the elimination of Social Security’s unfunded liability, this reform does more to reduce effective government debt than fiscal conservatives ever dreamed was possible up until now. The official score of the Chief Actuary of Social Security shows that the transition is economically feasible. Sweeping Benefits The sweeping and dramatic benefits of this reform would be truly historic, particularly in their advancement of long-term conservative economic policy goals. Conservative leaders are increasingly recognizing this. Those who have endorsed such reform include Jack Kemp, Newt Gingrich, Steve Moore and the Club for Growth, Grover Norquist and Americans for Tax Reform, Charlie Jarvis and the United Seniors Association, David Keene and the American Conservative Union, and Tom Giovanetti and the Institute for Policy Innovation. A recently released letter to the White House signed by 25 major conservative leaders urges the President to adopt a large personal account reform plan along these lines. Additional names on the letter include Bill Bennett, Dick Armey, Star Parker, Lew Uhler, Jim Martin, Robert Carleson, Richard Rahn, Kellyanne Conway, and Morton Blackwell, among others. These leaders are now joining together to form a new coalition, the Alliance for Retirement Prosperity to advance such reform. Hill Republicans may have been scared away from joining such a positive and historic effort out of the false fear that a reform plan would include large cuts in future, promised Social Security benefits as well. But the official score of the reform plan by the Chief Actuary of Social Security now shows that with larger personal accounts of the magnitude proposed here, future benefit reductions are not needed. Now is the time for conservatives, libertarians and progressives to join together to push this historic reform over the top. We have the power now to accomplish this if we work together.