How to Save Social Security

Commentary by John C Goodman

The President's Comission to Strengthen Social Security has concluded that Social Security is in trouble and needs a radical overhaul. The commission is right.

When today's 18-year-olds reach retirement age, paying their benefits will take more than 17 cents out of every dollar of taxable payroll, according to the Social Security system trustees. Add in Medicare and other elderly benefits and the tax burden is more than 30 cents.

These projections reflect the commission's intermediate forecasting assumptions, and they do not reflect the worst that can happen. If the commission's more pessimistic assumptions turn out to be true, we will need more than half of the income of future workers to pay benefits already promised under current law.

Will the government be able to collect from one-third to one-half of the income of workers not yet born? We cannot afford the risk that the answer to that question may be "no." And even if the answer is "yes," today's young workers will get less than a two percent real rate of return on their payroll tax contributions.

The alternative is a voluntary plan that would allow workers to put some portion of their payroll tax dollars into private retirement accounts. These accounts would be funded from the Social Security surplus. As the account balances grow over time, retirees would rely more and more on their private savings and less on government to pay their monthly pension benefits.

What would happen to people already drawing Social Security benefits under these proposals? Nothing. That's why it's so disconcerting to see opponents of reform trying to scare the elderly. Under every serious reform proposal, those already retired or nearing retirement would get all the benefits they have been promised.

What about the charge that many people are too unsophisticated to make wise investment choices? The answer is: no one is going to be allowed to choose individual stocks or make other risky investments. This is not Las Vegas. Instead, people will be able to choose among a number of private professional money management firms. The firms will be restricted to conservative investments in diversified portfolios.

What about the fear that people will lose all their money in a stock market downturn? All the reform plans have a built-in safety net that eliminates most downside risk. Under several proposals, the government would guarantee future retirees no less than they would have under the current system. And this is a guarantee the government could easily afford, as the accumulation of funds in private retirement accounts shoulders more of the benefit burden through time.

Why don't we just use the Social Security surplus to pay off part of the national debt as Senate Majority Leader Tom Daschle recommended recently? Because this approach doesn't solve the long-term problem. By 2022 we would have to start borrowing again. By 2050 we would have four times as much debt as we would have with personal retirement accounts, and the debt would keep growing indefinitely into the future.

The transition to a privately funded system would be gradual, taking many years. But moving now to personal investment accounts would enable us to make the transition and save Social Security without escalating taxes or escalating debt.