HUMAN EVENTS Interview:Personal Accounts Would Improve Social Security

Sen. John Sununu (R.-N.H.) will soon introduce Social Security reform legislation that would make the Social Security system permanently solvent, while guaranteeing no cuts in Social Security benefits and allowing workers to create large personal retirement accounts. The bill, sponsored by Rep. Paul Ryan (R.-Wis.) in the House, allows workers to invest an average of 6.4 points of their 12.4% payroll tax in a personal account, and then, when they retire, keep all their savings above what it costs to buy an annuity that would pay them the equivalent of current Social Security benefits. HUMAN EVENTS editors Terence Jeffrey, Allan Ryskind and Robert Bluey discussed the plan with Sununu this week. What are the basic elements of your plan? SUNUNU: The plan begins by recognizing that meaningful reform has got to include the ability of workers to take some of their payroll taxes and put them in a personal account. That’s important for two reasons. Personal accounts are the only way that I have seen presented to establish permanent solvency in the Social Security system. Raising taxes will not get us to permanent solvency. We’ve raised taxes 20 times since Social Security was created. It has never served to balance the system. I suppose it could be reasoned that cutting benefits will get us to solvency. But if you’re going to just look at the system and say let’s cut benefits, then you ought to at least give people the power to control some of their own retirement taxes. We begin with the premise that personal accounts are the way to achieve permanent solvency. And second, personal accounts make the system better because they allow individuals to control their own long-term retirement destiny. They earn a higher rate of return. They give lower- and middle-income workers an opportunity to get access to an IRA or a 401(k)-type plan. They are better because once the money is put into a personal account the government can’t spend it. That’s the approach we take: Individuals can create a personal account–10% of the first $10,000 they earn can go into an account and then 5% after that up to the Social Security earnings limit. You’re saying that personal accounts are key to the solvency of the program. Could you elaborate on that because the White House certainly isn’t saying those things? SUNUNU: We took our plan as I’ve described it to you–10% of the first $10,000 and 5% after that up to the Social Security earnings limit–and we still guarantee a minimum benefit for retirees equal to today’s benefit structure. We don’t change benefits at all. We submitted that plan to the Social Security actuary and asked: What’s the impact on the Social Security trust fund balances? And does this system establish solvency in perpetuity–forever? The answer to the second question was, yes, it makes the system solvent forever, in perpetuity. And the answer to the first is, we maintain positive balances in the Social Security trust fund over the next 75 years. It does make the system solvent, and it makes the system solvent because the accounts are of a significant size to enable a worker earning $30,000 per year to build enough in their account to give them a benefit at or above what Social Security otherwise would have given them. Therefore, they do not have to draw a check directly from the general fund or the Social Security trust fund. They will be provided that benefit over their Social Security benefit, out of their own personal account. Social Security is now estimated to go into deficit in 2018. Under your plan it can regain a positive balance around 2039. Is that correct? SUNUNU: It’s approximately 2040. The positive balances become very, very substantial over the subsequent 20 years. And they become large enough that we could consider a significant reduction in the payroll tax as early as 2055 or 2060. That’s a long time in the future, but the point is the balances are significant enough that the projection would be to reduce the payroll tax rather than come back as we have year after year to increase taxes. Is this just with the privatization plan or does it include the other things like reducing spending by 1%? SUNUNU: The plan is evaluated by the Social Security actuary as a whole. The reduction in the growth of government spending from 4.6% per year to 3.6% per year over the first eight years of the plan gives you resources to finance the transition. And then after the first eight years, we assume we go back to the 4.6% growth. But because the baseline is lower, it will be lower for decades to come and continue to provide resources that aren’t anticipated today. We have transition financing required for a shortfall in the current system over the next 30 years. That shortfall is going to remain almost under any plan. We cover that shortfall by doing a better job of controlling government spending. Given that your plan makes Social Security solvent in perpetuity, that it doesn’t have these exorbitant transition costs and that it makes people financially independent from the government upon retirement, why isn’t the White House making it its plan? SUNUNU: The transition costs aren’t insignificant. They are significant. And for a lot of people, the sacrifice of reducing the growth in government spending from 4.6% to 3.6% is a huge sacrifice. My attitude is that it’s the least we can do to give individuals more power over their own money, allowing them to set up a personal account to make the system solvent. But that’s a significant amount of money that will be made available over a 30- 40- or 50-year period. So that spending limitation is not insignificant. And it does make people anxious because there are a lot of people who think we can’t possibly control government spending as well as we did in the 1990s. The White House has floated a lot of ideas, including cutting benefits, raising the retirement age, changing the way benefits are calculated from being indexed to wages to being indexed to prices. Have they not talked about restraining the growth of spending as a way of paying for Social Security reform? SUNUNU: I’m sure they are willing to consider it. In their mind, it’s on the table. That would be a good way to do it. The President didn’t mention that in his State of the Union address that I’m aware of. But as you point out, all of those are ways to finance the near-term transition costs in a 15-to-25-year time period. There’s been some speculation that one reason the President might not simply adopt the Ryan-Sununu proposal is that Democrats eventually will not go for it. Is there some way you and Congressman Ryan could give the White House confidence by bringing some Democrats into the fold? SUNUNU: I’ve had nice conversations with Democrats about personal accounts and even about my legislation. But I think your perception is correct. The White House believes that it’s a plan that isn’t likely to attract significant Democratic support because it doesn’t raise taxes, it doesn’t have means-testing for higher wage earners and other things that Democrats might like to have included in a final package. But contrary to a lot of press reports, there are a number of Democrats–somewhere between five and 10–who are very interested in the idea of reform, are interested in the idea of personal accounts, and who I think would prefer their own leadership wasn’t being so heavy-handed on this.