Getting Social Security Reform...
What ever happened to reforming Social Security?
We haven’t heard very much about the subject over the past couple of years. The war on terrorism, tax relief, and issues like Medicare and prescription drugs pushed Social Security off to the side.
But legislation proposed on Tuesday, November 18, by U.S. Senator Lindsey Graham (R-SC) to add private accounts as a choice under Social Security is a first step in making sure that this very important issue will be debated as part of the presidential and congressional campaigns of 2004.
After all, the dismal outlook for Social Security hasn’t changed. Projections point to the program starting to pay out more than it receives in payroll taxes by 2018, with the revenue owed to Social Security by the federal government expected to run dry in 2042. These projections are anything but carved in stone, but the precarious structure of the system is clear to most everyone.
I would argue that two other factors are just as worrisome. First, individuals have no ownership in the current system. A person is taxed over an entire lifetime of work, but once a husband and wife die, for example, there is nothing to pass on to the kids or grandchildren.
Second, the returns on Social Security are simply horrendous. In President George W. Bush’s proposed budget for fiscal year 2001, the Office of Management and Budget reported that individuals born in 1925 would experience a 4.8 percent average annual inflation-adjusted rate of return, dropping to 2.2 percent for those born in 1950, 1.9 percent for those born in 1975, and 1.7 percent for those born in 2000.
Senator Graham’s legislation would provide individuals with choices. For those 54 years of age or under, one could either remain in the current system and pay a higher payroll tax in order to receive promised benefits; pay the current tax rate and get reduced benefits; or opt for a private account. With the account option, one could direct up to 4 percentage points currently paid through the payroll tax into an account (but only up to $1,300 a year), with the funds invested in stock or bond index funds. Obviously, one’s benefits from Social Security would be reduced accordingly, but would be more than made up for due to the enhanced returns from the private account.
Those 55 or older would stay in the current system. In addition, the government would guarantee an annual retirement income of 120 percent of the poverty level.
Other than a provision whereby federal taxpayers would provide a $500 matching grant for voluntary contributions from low-income workers – that’s a costly subsidy idea first hatched during the Clinton Administration – Senator Graham has laid a constructive foundation upon which this debate can proceed.
Allowing individuals the option of directing part of their payroll taxes into private investment accounts would establish individual ownership and present the opportunity for a more secure retirement. It also would be a positive for the economy in general, as revenues from payroll taxes currently being spent by the federal government would be redirected into the private pool of investment capital. That means those resources would be used in a more efficient and productive manner, which would be a plus for economic growth.
Most people can see that Social Security does not work properly. We can either raise taxes through the roof – and thereby deal a heavy blow to consumers, businesses, the economy and job creation – or we can help individuals and the economy by expanding Social Security to include the private account option. Let the Social Security reform debate resume.
Raymond J. Keating serves as chief economist for the Small Business Survival Committee.
