President Bush declared last month in his State of the Union address that reforming Social Security using personal savings accounts is one of his top priorities. Soon after his speech, Bush took to the road to rally support for his plan. Members of Congress, too, began introducing bills late last year and early this year suggesting ways to revitalize the ailing federal system.
Many lawmakers’ proposals embrace the use of private accounts. But, like Bush, lawmakers admit the accounts are only part of the solution. How much it will cost to fund the accounts, and where the money will come from, are the bigger questions. Bush has said he would borrow $2 trillion over 10 years to pay for the transition to private accounts, and not raise payroll taxes. Critics say diverting such a large sum of money from Social Security will cause the federal system to go bust many years before it’s projected to, which is in 2042, according to the trustees of the Social Security trust funds. Proposals on Capitol Hill would require smaller dollar amounts to fund the accounts. For instance, Rep. Paul Ryan’s (R-WI) bill, The Social Security Personal Savings Guarantee and Prosperity Act of 2004 (H.R. 4851), calls for $575 billion in transition financing over 16 years.
Congressional proposals also differ on how they would get the money to fund the accounts–via an increase in payroll taxes or borrowing from the Treasury Department–and on whether setting up a personal account would be voluntary or mandatory. President Bush wants to make the program voluntary. But a bipartisan bill sponsored by Rep. Jim Kolbe (R-AZ) and Allen Boyd (D-FL), the Bipartisan Retirement Security Act of 2005 (H.R. 440), would require mandatory participation in private accounts. Kolbe said during a recent conference on Social Security held by the Cato Institute, a non-profit public policy research foundation in Washington, that Britain switched to a mandatory private accounts system after its voluntary program failed.
Dallas Salisbury, president of the Employee Benefit Research Institute (EBRI) in Washington, says a voluntary program funded through a carve-out–an increase in payroll taxes–”makes it quite difficult to have a large proportion of people come out better.” Salisbury says that “on a run-the-numbers basis, proposals that are an add-on to Social Security and are mandatory create a much higher probability that individuals would be better off in retirement.”
Florida Republican Congressman Clay Shaw’s bill, H.R. 750, which was introduced February 10, would create an add-on whereby the money would come directly out of the “Treasury and be invested in accounts [managed] by well-known investment houses,” he told attendees at the Cato conference. Senator Lindsey Graham (R-SC), however, told conference attendees that he’s working on legislation that would take a portion of payroll taxes to fund the accounts. He’s also in favor of reducing the 12.4% Social Security tax rate, and increasing the current $90,000 wage threshold that is subject to payroll taxes. “We have to stop borrowing money for every problem that comes to town,” Graham said.
The Kolbe-Boyd bill would also create a carve-out whereby 3% of a taxpayer’s first $10,000 in earnings would be diverted into a Thrift Savings account–the retirement account for federal employees that includes a mix of conservative stocks and bonds. Once the taxpayer’s account reached $7,500, then it would drop to 2%. A person “could then move it into an SEC-approved fund,” Kolbe said. Taxpayers “can shift accounts to other investments as they age, and these accounts can be passed on” to their heirs, he said.
It’s fair to say that the members of Congress who have introduced bills to remedy the Social Security mess agree that personal accounts will help turn Americans into savers. Rep. Ryan told conference attendees that personal accounts are a great “equalizer of wealth” because “everyone becomes an owner.” Michael Tanner, Director of the Cato Institute Project on Social Security Choice, said that the last time personal accounts were floated was in 1983. “The market is up 800% since then, so imagine how much better off people would have been” if the accounts were created then.
Things Have Changed
Social Security’s plight is due to its pay-as-you-go funding scheme; there are now far fewer workers to support the benefits of existing retirees and American birth rates have declined. Today, there are only three workers per retiree; back when President Franklin Roosevelt created the system in the 1930s, the ratio was 43 workers per retiree.
Members of Congress also agree that fixing Social Security must be done now. Come 2008, which is right around the corner, the first set of baby boomers retire and the surpluses in the Social Security fund begin to dwindle. “If we don’t solve this problem [with Social Security] before the baby boomers slip into retirement, it’s over,” warned Senator Lindsey Graham.