A Better Way to Save Social Security

Commentary by Pete du Pont

Although President Clinton talks about the need to save Social Security, the White House has refused repeated calls to put forth a specific plan because it might be politically divisive. No one has ever accused this administration of being a "Profile in Courage" except, of course, the White House press office.

Fortunately, others are not so timid. Under Senator Phil Gramm's (R-Texas) recently released proposal, workers would be permitted to invest a portion of their payroll taxes in investment funds managed by professional money managers certified for safety and soundness and regulated by a new Social Security Investment Board. By making real investments and creating real wealth, the Investment-Based Social Security system would benefit from what Albert Einstein called the most powerful force in the universe "the power of compound interest."

These funds would be invested conservatively in diversified portfolios that will grow as the economy grows. The resulting pension benefits would be larger and more secure than those promised under the current system, but no worker would lose any guarantee he has under the current system.

Beginning in the year 2000, workers would be able to place three percentage points of the 12.4 percent Social Security payroll tax into private investment accounts. The full transition to an investment-based system would take about 50 years, during which time existing benefits would not be cut and taxes would not be raised.

In the interim, there would be a need for funds to finance the transition as we allow people to deposit a portion of their Social Security payroll taxes into private accounts. Three sources of funds would be tapped for the transition: (1) projected federal budget surpluses; (2) recapture of the increased corporate income tax from additional investment generated by the individual accounts; and (3) redemption of 29 percent of the Social Security Trust Fund's assets. The redemption of this portion of the Social Security Trust Fund will require the federal government to pay Social Security back 29 percent of what it has taken out of the system to fund other government activities.

Investment-Based Social Security under the Gramm plan answers virtually all of the concerns raised by critics of personal savings accounts. For example: Choice. All workers paying into the current Social Security system would have the right to continue to stay in the current system, or they could choose to participate in Investment-Based Social Security. All young workers entering the labor market for the first time, however, would be required to participate in the new system.

Benefits secured for current retirees. Unlike most other plans, the Investment-Based Social Security reform plan guarantees that benefits for the elderly will not be reduced either directly or through such indirect means as raising the tax on benefits, lowering the cost-of-living adjustment, or raising the retirement age.

Higher benefits under the new system. Everyone who chose to participate in the new system would be guaranteed a higher monthly pension than the one promised by the current system. Once fully implemented, the federal government would guarantee a pension 20 percent higher, however, most retirees would do much better than that. When fully implemented, young workers could look forward to pensions 2.5 times the size of those they would have received under the current system.

Benefits protected from politicians. Most Social Security retirees are painfully aware that benefits promised by one Congress can be revoked by a subsequent Congress. By contrast, private investment accounts established by Investment-Based Social Security would be the worker's private property and therefore constitutionally protected from government's sticky fingers.

No risk. Participants in Investment-Based Social Security would retain all benefits guaranteed by the current system and could never be worse off than they would have been in the old system.

Freedom to retire. Once the new system is fully implemented, workers would be able to retire at any age, provided they have accumulated assets sufficient to pay a monthly pension equal to 120 percent of the benefit promised by the current system.

Saving Social Security requires that we save and invest now rather than tax and borrow later. We have pushed this burden onto the next and next and next generation. It is time we take responsibility for ourselves.

Are you listening, Mr. President?

The National Center for Policy Analysis is a public policy research institute founded in 1983 and internationally known for its studies on public policy issues.