Personal Accounts Are No Cure-All
How conservatives should think about Social Security reform.


The only way personal accounts could fix Social Security on their own is if accountholders gave up traditional benefits far in excess of the taxes they put into accounts. For instance, individuals might put half their taxes into an account but give up all their traditional benefits. This would fix Social Security, but it’s not clear that most (or even many) workers would take the deal. You might come out ahead if you got solid investment returns, but you could also fall far short. This is just asking accounts to do more than they reasonably can.

That’s why most personal-account plans have worked in two stages: First, do whatever is needed to fix the current system — cut benefits, raise the retirement age, whatever. Then, offer the option of accounts on relatively favorable terms. This approach is fine, but it’s not the easiest to defend politically. Why? First, you have to admit that the accounts themselves won’t fix the program. Second, you’ll be attacked for the extra costs — usually borrowed — that would be incurred during the transition period. Third, you’ll be criticized for putting Social Security benefits at the whims of the stock market. You can respond to these attacks credibly, but you will be spending a lot of time on the defensive. As much as I support accounts philosophically, I’m not sure the political cost-benefit analysis weighs out in their favor, given all the other difficult choices we face on entitlements and the budget.

So in the end, the choices basically do come down to lower benefits or higher taxes. No one thinks we should cut benefits for true low earners, who need the safety net that Social Security provides. But there’s no reason middle and high earners should derive so much of their retirement income from the government. The real divide over Social Security policy is that the Left wishes to charge higher taxes on higher earners in order to pay higher benefits to higher earners. The Right should respond that these Americans can, should, and will respond to lower benefits by saving more on their own.

An approach that would give many of the benefits of personal accounts with fewer downsides is to fix Social Security’s finances on the benefit side, by increasing the retirement age, reducing benefits for middle and higher earners, and potentially reducing COLA payments to account for the CPI’s overstatement of inflation. Then, to make up the difference in benefits, institute universal 401(k) or IRA accounts. Taxes wouldn’t increase, total retirement income would approach the levels promised under current law, and individual retirement wealth would be increased. Under the circumstances, I’d call that a win.

The short story is that the government should focus on those things only government can do, such as the transfers to lifetime low earners that Social Security provides. Individuals and markets should do what they do best, which includes ordinary retirement saving for middle and high earners. That’s a decent recipe for social policy to begin with, and even more so given the multi-trillion-dollar budget shortfalls we face.

— Andrew G. Biggs is a resident scholar at the American Enterprise Institute. Previously he was the principal deputy commissioner of the Social Security Administration and, in 2005, he worked at the White House National Economic Council on Social Security reform.