TCS Daily

A New Approach on Social Security Reform

By James K. Glassman - July 20, 2005 12:00 AM

Since his re-election, President Bush has pushed hard for reform of Social Security, but he's made little headway on his proposal to let Americans divert part of their payroll taxes to personal investment accounts.

Polls show the public split roughly 50-50 on personal accounts. But most of the support comes from young people, who are apathetic politically, and confidence in Bush's own "ability to make the right decisions about Social Security" is weak and falling -- down to just 27 percent last month, according to a CBS News/New York Times survey.


It's time for a new approach.


But, before I tell you what it is, understand why the current efforts are failing:


- Americans have grown used to Social Security over 70 years, and change is both threatening and confusing.


- Reform has no strong constituency to rally support. Financial-services firms, for example, might benefit from the proposed personal accounts, but, at the same time, these firms fear that strict regulations, applied to the new accounts, would spread to 401(k) plans and other lucrative tax-favored plans that currently exist.


- Opponents, mainly AARP (the seniors' lobby), have mounted a wildly distorted but effective anti-reform campaign.


- Finally, the president's rhetoric is unconvincing. Yes, he's made the case that Social Security is headed for insolvency -- tax receipts from workers and employers won't cover benefits for retirees starting in 2018. But he has not managed to connect insolvency with his idea of personal accounts.


No wonder. These are two completely separate issues. Personal accounts won't prevent Social Security's impending bankruptcy. Personal accounts are great for other reasons: they will encourage savings, provide a more comfortable retirement, give people a nest egg they can own and increase personal responsibility. But the accounts won't solve the insolvency problem.


Bush should stop talking about these two issues -- insolvency and personal accounts -- as though they are connected. He needs to concentrate on one or the other to start.




You probably think I'll say "personal accounts." I might have, but a few months ago I took the administration's position in a debate in Reason magazine with innovative economist Tyler Cowen of George Mason University. Sometimes, you learn something from such an encounter. I now see that Tyler was right, and what follows is adapted from his argument.


I believe the president should focus on putting Social Security on a sound footing. The best way to do that is to adjust benefits by increasing the retirement age, cutting back payments further for those who choose to retire early and indexing the growth in benefits to the consumer price index (that is, inflation) rather than to wages. Raising payroll taxes -- or increasing the ceiling below which those taxes are collected -- should be off the table. Such a hike would have a disastrous effect on the economy.


Should we give up on personal accounts?


Not at all. Those accounts will grow organically as Social Security withers.


The inevitable result of benefit adjustments will be to reduce, slowly over time, the importance of Social Security in the overall retirement scheme. The system would become more of a safety net. Retirees would, very naturally, fill in the gap by saving more.


The vehicle for those savings would be personal stock and bond accounts -- which already exist!


There are 401(k) plans, IRAs, Roth IRAs, Keoghs, 403(b) plans and other tax-advantaged accounts. These should be consolidated under simplified rules. My preference is a universal, unlimited IRA -- income that you put into savings is not taxed at all. When you withdraw the money, at, say, age 60 or later, then you pay capital-gains taxes on it.


Two other wrinkles: First, adopt what's called the Pollock Plan (named after my colleague at the American Enterprise Institute, Alex Pollock, and now a Senate bill). All the bonds issued by the Treasury when it borrows Social Security money should go directly into the accounts of individual workers, rather than to a trust fund.


Second, provide matching funds so that low-income workers can set up their own personal accounts.


If we take steps to make Social Security solvent, personal investment accounts will blossom naturally, without the sorts of government rules and restrictions that would be inevitable under the plan envisioned by Bush. Investment firms will get on board, AARP will be disarmed and reform will actually happen. And not a moment too soon.


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