The new Social Security reform proposal put forward by Congressmen Bill Archer and Clay Shaw has a worthy aim: to secure future retirement benefits for today's young people without increasing taxes on workers or reducing benefits to retirees.
To fully appreciate the importance of the plan the Congressmen have constructed, consider what will happen if we don't do anything. According to the Social Security Trustees, by the year 2045, when today's 21-year-olds will be retiring, the payroll tax needed to pay Social Security benefits will be about twice what it is today. Whereas the current system takes about 10 per cent of the workers' income to pay retirement pensions, in the future the government will need one out of every five dollars.
This tax won't be imposed in a vacuum. When the cost of Medicare and other government health programs for the elderly are added in, taxes will be between one-third and one-half of everything workers earn, just to pay benefits under current law.
Just think about that. In order for youngsters entering the labor market today to get everything they are being promised during retirement, we are going to need as much as half of everything their children will be earning at that time. That's one-half off the top, before we build any roads, or pay the salaries of police and teachers. Will future tax payers, most of whom are not yet born, be willing to bear that kind of tax burden? It's unlikely.
Archer and Shaw have found a better way. Under their proposal, 2 per cent of everyone's wages would be invested every year in a private investment account that consists of stocks and bonds. But no one's take home pay would go down. The reason: the investment would be funded by a reduction in income taxes. Even those who don't earn enough to pay taxes would be able to get a "refund" from the government to fund their private investment accounts. Furthermore, everyone would be able to choose from among 50 private investment firms to manage their accounts. And these firms would be required to invest conservatively in a diversified portfolios.
Worried that your private investment account won't perform well enough to secure your retirement income? Don't. Under this plan, a government guarantee would insure that everyone receives a retirement income at least equal to Social Security's promised benefit. For example, if your private investment is only enough to pay 80 per cent of your retirement benefit, the government will pay the other 20 per cent.
Economic studies show that this plan can be fully funded from current government surpluses and the additional tax revenues that will be generated as the private accounts enlarge the nation's capital stock. Moreover, in the future we will be able to allow people to invest even more of their income in real assets and have much larger pensions than what Social Security promises. In short, this plan is all gain, no pain. We would be foolish not to adopt it.
Even so, the plan needs improvement in one important respect. According to Archer-Shaw, when individuals reach the retirement age, they must turn their account balances over to the government, which will then send out their monthly checks. Unfortunately, we can't trust Uncle Sam with all that money. Letting private annuities handle the job makes a lot more sense.