Politics & Policy

Personal Accounts or Bust

Social Security is still going broke, just like last year, and the year before, and . . .

I’m going to save you the trouble of reading all 218 pages of the Social Security Administration’s “2007 Annual Report of the Board of Trustees” by summing up the dizzying details in six words: Social Security is still going broke.

That’s right. Released Monday, the 2007 annual report is an echo of last year’s bad news — and the report before that, and the report before that, and . . . you get the point. By the year 2017, Social Security is scheduled to pay more in benefits than it receives in tax revenue, and the trust fund is scheduled to hit empty in the year 2041. The good news is that 2041 is one year later than projected in last year’s report. The bad news? There is no trust fund.

Currently, the government takes in more money in Social Security payroll taxes than it doles out in Social Security benefits. This surplus is conveniently referred to as the “Social Security Trust Fund,” a myth created by politicians to soothe their tortured consciences over the program’s impending doom. In actuality, this surplus revenue goes into the same account as all other tax revenue, and is spent on a variety of government programs. It’s no different than the revenue received from capital-gains taxes or income taxes.

When the government spends the revenue received from Social Security taxes, it calculates how much money is owed to the so-called trust fund, writes the number down on a piece of paper, and stores it in a cream-colored file cabinet in the Federal Bureau of Public Debt in West Virginia. These papers are essentially IOUs from one branch of government to another. When the surplus turns into a deficit in 2017, the government will open up the file cabinet and pull out the IOUs to claim payment. This is tantamount to blowing your salary on a sports car and writing yourself an IOU. When it comes time to pay your rent, you produce the IOU and say, “It’s okay. I owe myself $50,000!”

But of course, this money has to come from someplace, which leaves the government with three options for solving Social Security’s funding crisis: raise taxes, cut benefits, or borrow the money. These are the same options we would have today if there were no trust fund.

Supporters will argue that while unpalatable, any one of these options is necessary to restore Social Security’s solvency. But for all the talk of a funding crisis, the problem with Social Security runs deeper than its insolvency. Social Security is plagued by the negative rate of return a worker receives on his contributions to Social Security. 

The below-market rate of return that plagues the current system will only be aggravated by any of the three aforementioned solutions. If the government raises Social Security taxes, forcing workers to contribute even more to Social Security while keeping benefits steady, the rate of return gets worse. If the government cuts benefits while keeping the level of taxation steady, the rate of return also gets worse. And if the government borrows money to pay for Social Security, it will be forced to raise taxes to cover its debt — thus plunging itself into a vicious cycle of trying to tax-and-spend its way out of a hole.

Luckily, there is a fourth option, one that tackles insolvency and offers workers a greater rate of return on their contributions. That option is personal accounts.

There has been a lot of debate about personal accounts, but very little of it productive. Instead of having a substantive discussion about which solution best serves retirees, Democrats prefer to demonize personal accounts, painting the proposal as a boogeyman that will lead, as Ted Kennedy put it, to “the destruction of Social Security.” But there is nothing scary about personal accounts. Personal accounts simply give workers the freedom to invest a portion of their payroll taxes in a range of mutual funds, making them no different than the IRAs and 401(k)s that so many Americans use today.

The benefits of personal accounts over the current system can be illustrated with a numerical example. Let’s take a hypothetical 25-year-old male earning $32,000 a year with average wage growth. Under the current system, he will receive $2,780 per month when he retires, or a measly -0.72 percent return on his contributions (according to the handy calculations of the Heritage Foundation). Now imagine that our hypothetical worker invests the retirement portion of his payroll taxes in a bundle of stocks and bonds, earning a modest 4.9 percent return. When he retires at the ripe age of 67, he will have an account with his name on it worth $1.1 million, or $9,546 per month, ready to be spent on that cabin in the mountains he always wanted.

So the debate over Social Security comes down to one simple question: Would you rather have $2,780 a month in your retirement or $9,546 a month?

The funding crisis highlighted by the 2007 report presents us with an opportunity to fix our broken retirement system. But patching up Social Security with an old rag and a hastily sterilized needle will have us back in the same situation ten years down the line, and the worse for wear. Fixing Social Security means not only funding it, but creating the best retirement system possible given our limited resources.

Of course, the Democrats will oppose personal accounts, and will no doubt resort to the same kind of demagoguery they used in 2005 to sink any attempt at reviving the proposal. If Republicans are serious about achieving real, market-based Social Security reform, they will have to effectively communicate to the American people that the only real solution is personal accounts, while the boogeymen are the politicians who don’t trust the people enough to make their own decisions.

– Pat Toomey is president of the Club for Growth.

Members of the National Review editorial and operational teams are included under the umbrella “NR Staff.”

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