Personal accounts for Social Security should be the No. 1 economic policy priority for conservatives because, if done right, they would result in the greatest reduction in government in history.
If the payment of Social Security retirement benefits were shifted to personal accounts, as envisioned by the Ryan-Sununu bill, federal spending would drop by 5% of GDP. Federal spending is currently 20% of GDP but will rise dramatically in the future if we do not adopt fundamental reforms of all entitlement programs now.
Ryan-Sununu would finance about half the transition to personal accounts through limitations in projected total federal spending. That provision would reduce spending outside of Social Security by another 1.6% of GDP. Once personal accounts for Social Security are established and workers see how well they work, the accounts can be expanded to provide Social Security survivors-and-disability benefits through private life and disability insurance. That would reduce federal spending by another 1.5% of GDP.
The personal accounts would also dramatically reduce payroll taxes. According to the chief actuary of Social Security, under Ryan-Sununu Social Security payroll taxes would eventually be reduced from 12.4% to 4%. I estimate the taxes would be reduced further, down to 3%, because I believe the chief actuary overestimates the cost of the guarantee in the plan that ensures workers would receive at least the Social Security benefits promised under current law.
Market returns are so much higher than what Social Security promises it is unlikely workers would receive lower returns from personal accounts than from Social Security.
Workers under Ryan-Sununu would pay 6.4% of taxable wages into the personal accounts, in addition to the continuing payroll tax. But the payments into the accounts are not a tax. They remain the workerÃ?Â¢Ã¢â??Â¬Ã¢â??Â¢s personal property held in a personal account that the worker owns just like an IRA or 401(k). The money does not go to the government and does not finance benefits for others.
The continuing 3% to 4% payroll tax under Ryan-Sununu goes to finance the continuing Social Security survivors-and-disability benefits, which would not be changed under the bill. But if those benefits were financed in the future through personal accounts as well, the payroll tax would be reduced to less than 1%.
By contrast, under current law, if all promised Social Security benefits are to be paid, the 12.4% payroll tax would eventually have to be increased to more than 20%. Personal accounts would produce instead a large tax cut.
In the process of shifting to personal accounts, Ryan-Sununu would eliminate the unfunded liability of Social Security, currently close to $11 trillion. That is close to three times the current national debt. That would be the greatest reduction in government debt in history.
We must act now if conservatives are not going to be completely routed in the future on economic policy. The Congressional Budget Office projects that under current law, federal spending as a percent of GDP will soar from 20% today to 34% by 2050. With state and local spending added in, government will consume close to half of GDP. America will then have succumbed to European socialism, and conservatives will have lost. Personal accounts for Social Security are the key to stopping this impending disaster.