Should President Bush Scrap Plans to Privatize Social Security? NO, Investment-Based Reform is the Only Responsible Alternative

Commentary by Pete du Pont

President Bush should continue advocating his proposal to allow younger workers to divert a portion of their Social Security taxes into a personal retirement account (PRA) that would be invested in the market.

It's not like President Bush and Congress have a choice; the program has to be reformed. Social Security is funded on a pay-as-you-go basis. Taxes that come out of our paychecks today go directly into the benefit checks for today's retirees.

But by 2016, that won't be enough to fund all the benefit checks that year. And the problem gets worse each year thereafter. For example, the annual debt in 2030 alone will equal $687 billion. All told, between now and 2075, Social Security faces a long-term debt of more than $22 trillion - more than 11 times the size of this year's entire federal budget. That's a lot of money. If we do nothing and heap this huge debt on our shoulders, the economic consequences will be devastating.

This pending crisis is why President Bush and reform-minded Members of Congress - both Republican and Democrats - advocate the adoption of personal accounts. PRAs allow each generation to save for its own retirement and reduce the burden each successive generation of workers has to pay. As more and more people retire with personal accounts, the government's obligation to pay Social Security benefits is reduced. Over time, the government saves money.

Are there drawbacks? Of course, but let's be honest about them. There is a substantial transition cost involved, in the neighborhood of $3 trillion. But compare it to the alternative: For a $3 trillion short-term investment, the system is saved, the short-term investment can be paid back and Social Security is no longer a huge drain on government resources. By contrast, if we don't reform and attempt to balance a $22 trillion debt, the system is not reformed and remains in debt forever. Which is the more fiscally responsible alternative?

Critics of personal accounts typically charge that PRAs, because they are invested in the market, are too risky. After all, wouldn't the recent market downturn bankrupt small investors? Take a long-term view. In the short-run, the market is volatile; it goes up in some years and down in others. But over the long-term, the market always gains.

In fact, a recent NCPA study shows that over any 35-year period in the last 128 years (including the Great Depression, two World Wars and several recessions) the market returned an average annual real return of 6.4 percent. Consider the reform plans President Bush's reform commission made in December. If you choose to participate, your personal account has to earn only a 2.5 to 3 percent rate of return to qualify for a retirement benefit equal to what today's retirees receive, adjusted for inflation. That's not risky.

Some people don't like individual accounts. That's fine, but lets be very clear. If we don't enact PRAs we have few options to balance the program: Hand our problems to future generations by cutting benefits of future retirees or raising taxes on future workers. That's not a solution; it's a copout. It's just unfair to force our grandkids to bear a burden we refuse to deal with.

We can solve this problem ourselves for all time with personal retirement accounts. That's why President Bush needs to continue pushing for real reform.