Making Social Security a Money Machine

"Saving social security" will be a sizzling campaign issue next year. Instead of trying to preserve FDR's brainchild, why not transform it into something that enriches the economy and significantly expands retirement benefits? The Bush Administration will probably propose, as it has in the past, allowing workers to allocate a small portion of their Social Security tax to their own personal savings accounts. Democrats will bellow that this will destroy the program, and they will advocate more taxes on the "rich."

Since Republicans are going to get hammered for even considering changing the current on-its-way-to-going-broke system, they might as well be bold instead of tentative. They should advocate an exciting, whole-hog alternative to today's system, thereby making the reform effort worth the political heat.

The problems with Social Security are now largely known--the declining number of workers versus retirees, the fiscal irresponsibility of pay-as-you-go (it's the public-sector equivalent of a private pension system with no reserves, which, of course, is illegal). Experts argue about when exactly the system will begin to pay out more than it takes in. But no one's arguing that Social Security won't eventually self-destruct, unless it's infused with funds from massive tax increases or, equally unpleasant, scaled down by reductions in benefits.

The White House and the GOP should emphasize that Americans could choose to stay with the old plan or go with the new. But instead of permitting workers to put only 2% to 4% of their payroll tax into personal accounts, as the Administration proposed in 2001, why not increase that to 8% or more? Make the contribution significant from the start.

Critics will cry that this will increase the national debt. Not really. The obligation already exists. The unfunded liability of Social Security is now almost $12 trillion, even though that number is not officially part of the national debt. Any borrowings necessary to finance the transition could be treated like a mortgage: As more and more people under the old system pass away, a growing portion of the payroll tax that had been devoted to their benefits could gradually be redirected to paying down the borrowings. Within 30 years the obligations could be paid off. Instead of having a pension system that's a fiscal drain, we would have one that's a capital creator. Even those earning minimum wage would accumulate a meaningful nest egg by the end of their work lives.

A new system would have people focusing on the future, not just on the present, from an early age. Millions of people would be motivated to learn more about money and how to preserve and grow it. You, not Washington politicians, could choose your retirement age. No wonder pro-government tax-and-spend liberals hate this idea.

Whatever the particulars of the new system are, it should have these basic components:

** Guaranteed minimum monthly payments adjusted for inflation, regardless of how your account performs. This would remove a lot of what-if-the-financial-world-collapses-just-as-I-retire angst.

** A small portion of the payroll tax should go toward disability and life insurance, which would provide more generous benefits than similar components do in the current Social Security scheme.

** People should be able to choose from an array of investments (including those with no participation in the stock market): diversified mutual funds that meet certain conservative financial criteria, including low expenses; fixed-rate insurance contracts; U.S. government bonds; government-insured bank CDs; and the like. Government workers in Galveston, Tex., for example, opted out of Social Security two decades ago, and their money went into fixed-income instruments only. Even so, their retirement benefits are significantly higher than those they'd have received had they stayed in Social Security. You should not be able to put money into individual securities (like Enron) or into such exotic alternatives as diamond mines in Uzbekistan.

** Benefits should be exempt from income tax.

** Married couples' contributions should be split from the get-go, i.e., half of the husband's contribution should go into the wife's account and, if she also works, vice versa. That way, if there is a divorce, there'll be no fighting over those private accounts.

Bill Shipman, chairman of CarriageOaks Partners and co-chairman of the Cato Project on Social Security Choice and who also helps the Heritage Foundation and others promote reform, has done extensive work demonstrating that such a system can be created with extremely low administrative costs. He proposes a three-pronged approach. At the first level, workers' money would be invested in a collective money market fund similar to the ones the mutual funds industry offers today. Then the participants would have four choices--among three balanced funds and a money market account. The balanced funds would be diversified portfolios that combine stocks, bonds and cash. One such fund that might appeal to younger workers would be geared toward equities; another, appealing to those closer to retirement, would be geared toward bonds. After several years--the time needed to build up the assets to realize the economies of scale--workers would have the opportunity to allocate their funds among any qualified investment accounts that met reasonable and specific standards.

The reason all money would initially go into money market accounts is a largely unknown peculiarity in the way the feds now keep Social Security records: Employers send in Social Security taxes in lump sums periodically throughout the year. Incredibly, only in the following year are those lump sums allocated to specific individuals' accounts.

There is nothing to be gained--and fantastic opportunities to be lost--by the Administration's being timid.

William Shipman Biography
  

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