No. 21
May 12, 1999
By Joanna Elachi

Social Security has long been characterized as the third rail in American politics—touching it meant certain political death. Today, talk about reforming the system has escalated, but it seems that politicians are still just as apprehensive about taking action. No one wants to push real fundamental reform, and no one wants to take the responsibility for that reform failing to occur. Both leading Republican and Democratic proposals are tentative at best, with a focus on postponing Social Security’s collapse rather than ensuring a better retirement future for Americans.

At the heart of the Social Security debate is the admission that our present system isn’t working well enough to serve its function of providing a secure and reliable retirement fund for our nation’s elderly. It can be supplemented and propped up with as many sticks as lawmakers can find—increasing the retirement age, cutting benefits, increasing payroll taxes—but the fact remains that the cumbersome program will eventually collapse. According to the government’s own actuaries, the program will begin to run at a deficit as early as 2014.

Today’s retirement benefits rely on the payroll taxes of today’s workers, in a pay-as-you-go scheme. Although this type of system could never generate any real profit for its ‘investors,’ it would only remain solvent if the pool of workers always substantially outnumbered the pool of retirees. In 1950, there were 16 workers paying each retiree’s benefits. Today the worker to retiree ratio has dropped to 3:1. In 2025, when the baby boom generation has retired, the ratio will sink even further.

There are more than a dozen plans before Congress that seek to privatize Social Security, based on the following goals: to increase the rate of return that an individual can expect on his retirement savings; to allow the private accumulation of assets that can then be passed on as inheritance; and to remove the perverse incentives inherent in the Social Security fabric, such as working past retirement age resulting in decreased benefits.

The strong interest among some lawmakers to shore up, rather than transform, the system has split the debate primarily along partisan lines and paralyzed burgeoning attempts at plans for real reform. Instead we’ve seen a number of irresolute proposals that lack any sort of a cohesive and forceful stand.

President Clinton recently unveiled the details of just such a plan—Universal Savings Accounts (USA), a supplement to Social Security which would give a small $300 tax credit to low and moderate-income workers and their spouses that would then be deposited into these USA accounts. Depending on the worker’s annual income, a government match for additional monies deposited into the account, up to $350, would be available.

For example, a couple with two children making $20,000 each would be eligible for the full benefits of the plan. As a couple they would receive the $600 tax cut and should they each decide to invest an additional $350, the government would match that, for a total of $2,000 deposited into this private account annually. The money would be invested in stocks and/or bonds and would earn, at the most conservative estimate, a real return of 5%. This plan would be financed with approximately 12% of the projected budget surplus over the next 15 years.

The oddity of Clinton’s USA plan is that it acknowledges the merits of a privatized system without actually privatizing the system. The logic is sound— Americans, especially low-income Americans, are not being well-served by the extremely low rates of return and imminent bankruptcy of the present system. The obvious correction is private pension funds, carrying the assurance of far superior rates of return and legal entitlement.

However, Clinton proposes to add this private codicil without reforming the present system and available only to a certain segment of the citizenry. Worse, the implication is that the government would be the investor of this rather large sum of money (estimated to be $38 billion a year), which amounts to nothing less than the nationalization of at least a segment of the economy. Political interests could drive investment choices, rather than the preferences and interests of individuals.

When Clinton first proposed the USA plan in his State of the Union address, he stated that "with these accounts, Americans can invest as they choose." Indeed, our government has too long overlooked individual choice and personal responsibility.

Australia, Chile, and Great Britain, to name only a few, have privatized their government pension systems and are now witnessing significant benefits both to their workers and to their economies as a whole. Chilean workers receive a 12% average real return on their retirement savings. Social Security provides Americans with an average real return of less than 2%, sometimes dipping to a negative percent. A low-income, single, African-American male born after 1959 will get back less than 88 cents for every dollar he pays into Social Security.

Public opinion polls show that Americans have lost faith in the ability of the present system to provide for their retirement, and that they desire fundamental reform. After moving the debate to center-stage, Clinton has backtracked into a weak and indeterminate position. He is not alone—few members of Congress are exhibiting the resolve that must accompany innovative reform. It is time for bold change. Forget USA accounts and pouring more money into a rapidly failing system. Give Americans a secure system in which they can truly invest as they choose.

For additional information, contact Joanna Elachi at (415) 989-0833.