NCPA - National Center for Policy Analysis


December 16, 2004

Many skeptics are concerned about the leading proposal for making Social Security more secure: personal retirement accounts. They say these accounts will be buffeted by fluctuations in the stock and bond markets. And they worry about transition costs: If workers are directing a portion of their payroll taxes into personal accounts, they aren't making those funds available to current retirees. Some experts say that could create as much as a $2 trillion to $4 trillion hole in Social Security's ability to pay retirement benefits.

Concerns about market fluctuations are understandable. As for transition costs, skeptics should worry more about the price tag of the status quo, says William Beach, director of the Center for Data Analysis at the Heritage Foundation:

  • Ensuring financial security through retirement-grade investments is something top money managers do every day; we should follow the advice of retirement experts who urge workers to shift more of their investments to secure bonds as retirement approaches.
  • If we do nothing, Social Security will owe $27 trillion in promised benefits during the next several generations of retirees; Social Security's trustees say the system will have to cut promised benefits by about 25 percent in 2042 -- and that's just for starters.

A reformed system with personal accounts is far less risky, says Beach. Borrowing the costs with a planned repayment system makes sense because it would slash that $27 trillion IOU and make it far more likely that we can pay adequate retirement benefits. The United States has nearly always borrowed to finance crucial changes to its economic infrastructure, and making Social Security more secure is one of the most important changes we could make. Indeed, it is fairer to secure working America's retirement by borrowing funds from wealthy Americans and foreign investors than by raising taxes on labor.

Social Security reform will be costly, but doing nothing is worse, he says.

Source: William Beach (Heritage Foundation), "Don't delay reform," USA Today, December 16, 2004.


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