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To reform Social Security: steer clear of tax hikes & benefit cuts

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Why We Need Personal Accounts

To reform Social Security: steer clear of tax hikes & benefit cuts

The average Social Security benefit for a single retiree this year is $920 per month. The problem with this benefit is not that it is too high. The problem is that it is a pitifully small amount. That is why we need personal accounts, so workers can get a better deal than the old Social Security framework offers them now. If Republicans approach Social Security and personal accounts with this positive, populist message, they can and most likely will win. But we didn’t hear a focused, positive, populist message on personal accounts from the President in the State of the Union last Wednesday night. We did hear a reasonably good discussion of personal accounts. But that was then buried with a discussion of a number of other negative options the President wanted Congress to consider to balance Social Security’s long-term books. These included further delaying the retirement age, changing the basic benefit formula to sharply reduce future promised benefits, discouraging early retirement, and possibly even raising the cap on the maximum taxable income for the payroll tax. The discussion of these negative proposals just greatly confused the issue. The American people overwhelmingly oppose all of these proposals. None of these proposals has anything to do with personal accounts. Neither the President nor any other Republican campaigned on any of these proposals. What the President and other Republicans have campaigned and won on is personal accounts. Unlike the other negative ideas above, the polls have long shown overwhelming public support for personal accounts, borne out in real world elections. Republicans now have a mandate for personal accounts. They don’t have a mandate for any of the other negative benefit cuts or tax increases the President discussed. Ideologically for conservatives, personal accounts are the big enchilada, because they hold the potential for the biggest reduction in government in world history. Through the personal accounts, ultimately all Social Security spending can be shifted to the private sector, dramatically reducing taxes as well. In legislation introduced by Rep. Paul Ryan (R.-Wis.) and Sen. John Sununu (R.-N.H.), the percentage reduction in Social Security spending that would result each year with the creation of large personal accounts would be 40% in 2040, 67% in 2050, 80% in 2056, and eventually 95%. With this reduction in Social Security expenditures, the program under the Ryan-Sununu bill would achieve permanent surpluses once the personal accounts were phased in. At the same time, workers would get better benefits because of the much higher returns in the private capital markets than Social Security even offers workers today, let alone what it can pay. With the personal accounts, workers would enjoy personal ownership and control. They could leave accumulated funds to their families. This is a winning populist message. Indeed, this message appeals greatly to core Democrat constituent groups like African-Americans, Hispanics, and low- and moderate-income workers. Personal accounts represent the only chance for these workers to accumulate some substantial personal savings and wealth for their families. If Republicans stick exclusively to personal accounts and positive, populist arguments for their adoption, they can gain enough support to get the proposals through Congress. They need just enough Democrat support to get the proposal past a Democrat filibuster. They don’t really need Democrat political cover because the personal accounts are popular and a winning issue. Too much has been made about the transition “costs” of personal accounts. The transition financing for the reform is equivalent to the amount of money going into the personal accounts of working people across the country. The higher the number, $2 trillion, $3 trillion, $4 trillion, the more going directly into the pockets of working people. Moreover, in return for this transition financing, the current $10.4 trillion in Social Security’s unfunded liabilities is eliminated. In this way, Republicans can turn the tables on Democrat critics harping on transition “costs.” Ultimately, this problem can be minimized by starting with smaller accounts then phasing up to the full amount of Ryan-Sununu, 6.4 percentage points of the total 12.4% tax, or roughly equal to the employee share of the tax. This is what Republicans in Congress should now advance, setting aside all of the other negative ideas the President raised. Details of the President’s proposal released separately show he would actually phase up to a full 4% account for everybody, which is a darn good start. The President needs to be greatly commended for putting personal accounts on the national agenda. That is a huge breakthrough for conservatives. But if the positives of personal accounts get lost in the negatives of the other proposals the President discussed, we are not going to accomplish anything. The Democrats are not going to feel any public pressure, or pressure from their base, to delay the retirement age or cut the basic benefit formula. Instead, they are going to play themselves to the public as the ones who saved them from these negative ideas. That in turn will only threaten the new Republican Congressional majorities. Those majorities are important to conservatives on all issues across the board–abortion, taxes, gun rights, gay marriage, government spending, tort reform, regulation, etc. The last thing we want is for a poorly crafted Social Security initiative to backfire and hurt conservatives on all issues across the board.

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Written By

Mr. Ferrara, who served in the White House Office of Policy Development under President Reagan, works for the American Civil Rights Union and the Institute for Policy Innovation.

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