Not All Social Security Reform Plans are Created Equal
by Matt Moore
July 24, 2000
Presidential hopefuls Al Gore and George W. Bush both recognize that Social Security is in trouble, and both have developed extensive plans for dealing with the program's projected financial shortfall. But not all Social Security reform plans are created equal.
Social Security is a Pay-As-You-Go system, in that today's workers pay the benefits for today's retirees. In less than two decades, by 2016, Social Security will begin spending more money on benefits than it takes in from workers in taxes.
At that time, we will have to dip into the Social Security trust fund to meet its obligations to retirees, until the trust fund runs dry in 2039. Then, the program's only source of income will be from workers' payroll taxes - and that will only be enough to cover 72 percent of the benefits that the program owes. If no changes are made, benefits will have to be cut by nearly a third or taxes will have to be raised on workers to cover the 28 percent deficit. This is not conjecture - it is going to happen - and we have to address it soon.
We are in this situation because of demographic realities. The system worked as long as the number of people supporting the program would always increase faster than the number of people collecting benefits. However, advances in medical technology means people are living longer in retirement and collecting more Social Security benefits. At the same time, the birth rate is falling. More and more people are collecting benefits while fewer and fewer people are paying taxes to support them. The system's Pay-As-You-Go structure is unsustainable in the long run.
If we act now, we can save the system. And both candidates have reform plans on the table.
Gov. Bush has discussed the broad strokes of his Social Security reform plan. Bush would give workers the freedom to invest a portion of the Social Security payroll tax they currently pay into a personal retirement account, that they could own and control. Because of the benefits of compound interest (if you earn interest each year and reinvest it, you earn interest on your interest) - combined with a prudent long-term investment strategy - all retirees can expect a return greater than that offered by the current system. Bush's plan breaks us from the long-term problems associated with the flawed Pay-As-You-Go structure of the current system.
Vice President Gore, appearing on "Meet the Press" two Sundays ago, outlined a very different approach. Gore would use today's Social Security surplus to retire the national debt. The savings generated by lower interest payments would be diverted into the Social Security trust fund, which would extend the life of the fund to 2054 or so. But Gore's plan provides a short-term fix for the long-term financial problem - it still leaves the current system in place. The day of reckoning is simply postponed.
Recognizing the increasing popularity of personal accounts, Gore would also provide personal accounts with government matching funds for lower-income workers on top of the current structure. This approach is good for low-income workers, but does nothing to remedy Social Security's long-term fiscal crisis; in fact, it burdens the program with additional costs. Beneficiaries make out like bandits - until the program collapses around them in 2054.
By incorporating personal accounts, Gore shows that he must know, deep down, that long-term investing is not all that risky, even for low-income workers. You pick an investment fund - perhaps with the guidance of the government - and you leave your money there for 40 or so years. In the long run (even including the years of the Great Depression) the value of the stock market has always gone up. Investing in the stock market over the long term is a safe investment.
That is why Bush's plan to replace the failed Pay-As-You-Go structure with personal accounts is a good deal. Gore's plan is the one that is risky - he's gambling that we can maintain the current system that is breaking apart at the seams. Just because both candidates have plans on the table does not mean they are both equally good alternatives. Not all plans are created equal.