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Congressman explains his plan for fixing Social Security

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HUMAN EVENTS Interview:Rep. Ryan: Let’s Totally Transform Social Security

Congressman explains his plan for fixing Social Security

Rep. Paul Ryan (R.-Wis.) and Sen. John Sununu (R.-N.H.) are co-sponsoring what conservative experts say is the best and most thoroughly thought-out Social Security reform plan yet proposed in Congress. It would truly create an “ownership society” by allowing all workers to invest 6.4 points of their 12.4% payroll tax in a private account, and then keep all their savings above what it costs to buy an annuity that would pay them the equivalent of Social Security benefits. HUMAN EVENTS editors Terence Jeffrey, Allan Ryskind and Robert Bluey recently discussed the plan with Ryan.

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What is the basic structure of your plan? REP. PAUL RYAN (R.-WIS.): The annual investment is 6.4%, which is a little over half your current payroll tax. We don’t cut benefits. We don’t change benefits at all, not even for the over-55s or the under-55s. There’s a safety net underneath the accounts, which means you’ll get what you would have otherwise gotten with Social Security. The reason we can afford that is because Social Security grows at such a miserable rate of return and the markets do so much better that that’s a fairly low safety net. So if your investments pay only $1,000 a month and Social Security would give you $2,000 a month, the government would make up the difference? RYAN: Exactly. The government makes you whole. It’s affordable because the government benefit grows at a certain pace and the market grows at a much better pace. Now what if the government benefit was $2,000 and your investments are paying you $2,400? RYAN: You get all $2,400, and the government’s off the hook. You get zero from the government. That’s how you bring Social Security into solvency. That’s the tough thing to describe to people. We call it the benefit offset. The way our bill works, according to the Social Security actuaries, starting in 2024 we go into permanent surpluses in Social Security. We pay off all the transition financing by 2063 and we produce such surpluses that we end up reducing the payroll tax down to 5%. How is that achieved? RYAN: You shift the benefit obligation from traditional Social Security over to personal accounts. And you anticipate that because it will be so attractive many people will opt for personal accounts? RYAN: We guarantee you’re going to get what you otherwise would have gotten had you stayed in Social Security. We would have a huge participation rate. I think the actuary says 97% or somewhere in that range. Some people say you then create a moral hazard. How do you deal with that? RYAN: The investment parameters are regulated by Social Security just like the federal employees’ thrift savings plan. You can’t pick and choose any stocks and bonds within your account. They are very conservative investments. Are they privately run investment companies? RYAN: Yes, regulated by Social Security but contracted out–just like the federal thrift savings plan–to private firms like Schwab or Vanguard or whomever. They will put together these funds that Social Security will approve and then people can invest? RYAN: Exactly. The cost of administrating is going to be less than 30 basis points. That’s $3 for every $1,000. You have to buy an annuity when you retire equal to your minimum [Social Security] benefit. That annuity that you’ll have on your account will keep you from ever becoming a ward of the state and going back on welfare. Then you get the rest of the money in your account to do with what you want. Social Security is protected because you finance your benefits out of your private account. Now, for a 52-year-old who gets this account because he makes the 54-and-below cutoff, obviously over the next 14 years of his working life he probably won’t outgrow his traditional Social Security benefit, so he will get what he had already paid into Social Security plus his account. And if that doesn’t make up the difference, Social Security will make him whole. In other words, if a person starts at 25 and is investing his 6.4% and ends up with $1 million, he would buy an annuity that pays him the minimum benefit, and then Social Security is off the hook forever? RYAN: Forever. And the surplus from the person’s investment? RYAN: It’s his money, tax-free. It seems the administration is looking at personal retirement accounts as a sidelight to traditional Social Security and that you’re looking at personal retirement accounts as a total transformation of Social Security. RYAN: Absolutely. It would be a total transformation. Our bill converts the system from a pay-as-you-go transfer system to a full-funded system where workers pre-fund their retirements and own their individual accounts. Why is the White House reluctant to get behind your plan? RYAN: The reason they didn’t is that they’re worried about the transition costs. The President had another number out there: Cut the deficit in half in five years. It’s important to recognize a very important fact: All we’re doing with transition costs in Social Security is recognizing existing debt we already have on the books and paying it off early on a discounted present-value basis. We’re refinancing a debt we already owe. Politically, they don’t look at it like that. What would the transition costs be next year if your plan were to go into effect? RYAN: My 10-year transition cost number is around $2 trillion. Pretty high. That’s scary for most people. RYAN: Sure, absolutely. Sununu and I have four mechanisms for paying for the transition. First, we dedicate all the remaining surpluses from Social Security to Social Security. No more raiding the Trust Fund. Second, we cap non-Social Security government spending. We put a cap on the overall growth of spending. You’re talking about the total budget, not just discretionary spending, is that correct? RYAN: That’s right, mandatory and discretionary, except for Social Security. Grow government at 3.6% a year for the next eight years instead of the current projection of 4.6%. To put that in perspective, during President Clinton’s eight years, government grew at 2.6%. We’re simply saying, grow government a percentage point faster than Clinton did and a percentage point slower than the current projections and then transfer the savings over to this plan. That’s where we get most of the money to pay for this. Your costs are $2 trillion over the first 10 years, but don’t you also have some transition costs going out into the future? RYAN: That’s what I’m getting at. Surpluses go back to Social Security, cap the growth of government spending, and then what all the economists are telling us is that because of all this new investment in the stock and bond markets, you’re going to see a huge resurgence in corporate tax revenues. To the extent you get additional tax revenues because of this, that also goes to financing the transition. The way I do it is pay back the bonds, the IOUs, in the Social Security Trust Fund. And the fourth financing arm of our transition plan is to issue bonds–borrow money–to the extent that’s necessary. What the actuary is telling us is that all the borrowing we would have to do is $575 billion over 16 years. . . . The plan pays for it. The net effect of debt is zero and we completely wipe off the book the $10.4-trillion liability we have to Social Security. It seems too good to be true? RYAN: Well, you have to go after government spending. And if you don’t get as much corporate revenue as we predict, you have to float more bonds. When you say, “go after government spending,” that doesn’t help Social Security per se, it just prevents additional borrowing? RYAN: I want to marry the two causes. I want to marry the cause of controlling the growth of spending with getting personal accounts in Social Security. We lost on the House floor substantially when he brought our budget to the floor last summer. And we did so because the appropriators were against us. We didn’t have grassroots support for changing the budget rules and controlling spending in this place. That’s how I came around to adding spending discipline as the mechanism that pays for transitioning Social Security to personal accounts and saving the system. Because I do that, I don’t have to go after benefits. I don’t have to change from wage to price indexing.

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