It was only a matter of time. For a year and a half Democratic presidential candidate John Kerry has gone to great lengths to avoid discussing Social Security. Yet now, with just a touch over a month to go before Election Day, Sen. Kerry has made the trip down to Florida to scare seniors about Social Security reform. After all, this has been a recurring feature of every presidential campaign in recent memory.
Citing a new “study” by one of his campaign’s advisors, Kerry attacked President Bush’s Social Security reform proposal, charging it would cut benefits for seniors and would amount to a windfall for Bush campaign contributors on Wall Street. To borrow a phrase from Kerry’s own talking points — this charge is wrong. He is wrong when he tells seniors Bush will cut their benefits and he is wrong when he says investment-based Social Security reform will bring huge administrative costs.
First it must be stressed that no proposal for an investment-based reform of Social Security (i.e., any plan that includes the creation of personal retirement accounts) would result in benefit cuts for current retirees or seniors near retirement. Not the president’s proposal; not any plan currently before Congress. All of these plans keep current seniors in the current system and guarantee that they will receive all the benefits they are currently promised.
As for the issue of administrative costs, it is reasonable to expect that firms managing personal-retirement-account assets would receive compensation for their services; after all, there would be some 148 million accounts to manage. But this is not the “windfall” Kerry suggests. Personal Social Security retirement accounts, if properly constructed, can be managed at a low cost that allows participants to enjoy their retirement savings.
In order to justify their charge, the Kerry campaign’s study creates a high-cost scenario for how a reformed system would work. For example, they assume the reformed Social Security system will be based on fancy 401(k) and mutual fund plans with all the bells and whistles. Most 401(k) or mutual fund plans give workers many investment choices, the ability to shift between funds as often and frequently as they wish, and the ability to borrow against their account balances.
This completely ignores the significant research that has been done by the Social Security Administration, the General Accounting Office, and others, on how to keep costs down. While the Bush campaign has not specified how their reformed program would work in every detail, most personal-retirement-account proposals would limit the options participants have, providing them with a choice from a limited number of index funds. By limiting options and structuring the accounts carefully, administrative fees could be much lower.
For example, the General Accounting Office (GAO) says “estimates for a centralized system with limited investment choices and customer service are as low as 0.1 percent of assets per year.” Bill Shipman, formerly a principal of State Street Global Advisors, suggests that fees could be as low as 0.18 percent to 0.34 percent of assets over the first five years, depending on assumptions made.
The Thrift Savings Plan (TSP) — the low-cost retirement savings plan for federal employees — provides a model for simplifying account administration and reducing fees. The TSP board selects the assets manager of its funds through competitive bidding, so individual workers are not bombarded by advertisements and promotional materials. Currently, the board contracts with BGI, the largest American index-funds investment manager. BGI invests TSP participants’ savings in trust funds in which the holdings of public and private employee-benefit plans are invested together.
Amazingly, in neither Kerry’s public statements nor the accompanying nine-page fact sheet, did the Kerry campaign outline how he would reform the system to protect the retirement security of future generations. In fact, there wasn’t even an acknowledgment that there is a problem that requires a solution.
But make no mistake, Social Security is in trouble. Social Security faces an $11 trillion unfunded liability. In order to bridge that gap and fully keep our promises to future generations of retirees, taxes will either have to increase by half, all other government spending will have to be cut by 20 percent, or we will have to shift to a system where each generation invests to help fund their benefits. If not personal investment, then which option is Sen. Kerry proposing? I’m sure the millions of non-senior voters across America are anxious to hear his answer.
– Matt Moore is senior policy analyst for the National Center for Policy Analysis.