Late last year, President Bush's Social Security reform commission released its recommendations for fixing Social Security. Even before its final report, the commission was the target of an incessant campaign of attacks, which has only intensified as we near Election Day.
While the critics focus on the President's commission's plans, Members of Congress should take note that those recommendations are just the beginning of the discussion – not the end. Congress is free to devise its own reform plan, and it can do so to reflect not only the commission's recommendations, but also a variety of other options readily available.
One such option is a "hybrid" reform plan developed by my colleagues at the National Center for Policy Analysis (NCPA). The NCPA plan combines the most attractive features of major plans developed by both Republicans and Democrats over the past several years. It includes no benefit cuts for those who contribute to a personal retirement account (PRA) and no long-term tax increases.
If Congress establishes personal accounts as prescribed in this plan, administrative costs can be minimal, current benefit levels can be guaranteed and the long-run funding problem within Social Security can be solved.
The NCPA plan allows younger workers to deposit two percentage points of their current 10.7 percent Social Security tax in a personal retirement account (PRA) that they would own and control. Workers would choose from a select number of portfolios that reflect the market as a whole – 70 percent stocks/30 percent bonds – sponsored by government-approved fund managers.
Participating retirees would receive two monthly benefit checks: one from a PRA and another from the government to bring benefits up to currently scheduled benefit levels.
The NCPA proposal assumes a dollar-for-dollar offset. Each dollar in an individual's account reduces the government's obligation by a dollar. For the first several decades under the new plan, annuities would not play a significant role. But in the future, account balances will be large enough to annuitize the scheduled benefit.
Administrative costs on the NCPA's personal accounts can be held to 0.2 percentage points. To achieve this goal, the Social Security Administration would be responsible for collecting employee data, making deposits and administering accounts for employees of small businesses and firms that do not have automated payroll. Thus, these businesses would face no additional administrative burdens. However, large businesses and those with automated payroll could administer the accounts themselves, much as they administer 401(k) and 403(b) employee retirement plans today.
Smaller deposits could be pooled into large, generic funds until they grow to about $500 to $1,000, when they would be large enough that funds would want to compete for them. Once the accounts were transferred out of the generic funds, account holders would have more options. Investors would be able to check earnings daily in newspapers and continuously online.
The long-term costs and benefits of the NCPA plan were calculated with a computer simulation model developed by the Private Enterprise Research Center at Texas A&M University and the NCPA. According to estimates derived from the model:
- Without reform, by 2070 Social Security's expenses (the retirement portion only) will exceed income by 5.08 percentage points of taxable payroll, almost half of the program's income in that year.
- By contrast, under the NCPA plan Social Security's annual income will exceed its annual outgo by 2058; in 2070 the program will run an annual surplus of about 0.23 percent of taxable payroll.
According to the model's calculations, the personal retirement account plan will initially be more expensive to maintain than the status quo each year. This makes sense because workers will be called upon to support two systems: the status quo system and the personal account system. However, once people with personal accounts start retiring – and depending on their investments for more and more of their retirement pension – the burden on Social Security will be forever reduced. By 2033, the new system will be permanently less expensive than the old one.
Personal Retirement Accounts ensure that Social Security funds are used for retirement spending as intended. They also ensure that savings will actually take place, as individuals are more likely to watch their personal account balances than they are to see that Congress reduces the debt by the amount of the Social Security surplus. And they pave the way for lower payroll taxes in the future.
For our children's sake, we can only hope that the politicians will soon set the political games aside and focus instead on the serious business of reform.