Essential Element of Reform

Published In:  The Washington Times 

Those who decide what is conventional wisdom inside-the-Beltway are pushing the idea President Bush is losing support for his plan to reform Social Security with personal retirement accounts and it is time for him to cut his losses.

The argument goes something like this: "Since PRAs don't solve the solvency issue, they're not worth the hassle."

If President Bush's efforts were all about political calculation, this might have some merit. Someone thinking solely of political calculation probably wouldn't have suggested reforming Social Security at all. No, this has always been about recognizing a serious problem and focusing on what he thought was right.

Now it is true some are beginning to question whether PRAs are a good idea. Chalk this unfortunate reality to the fact that while the Bush administration has focused on Social Security's problems, opponents have pounded away at PRAs with a bevy of scare ads and misinformation.

The question of the hour is: If personal accounts don't solve the problem, why are we talking about them? The quick answer is PRAs were never meant to be a silver bullet, but they are essential to any viable reform package.

According to the latest report of the Social Security Trustees, Social Security faces an unfunded liability of more than $11 trillion. That means we would need more than $11 trillion in the bank today, earning interest, just to pay all the benefits the current system promises.

Under most reform proposals, PRAs do not shore up the solvency problems on their own. After all, it is unlikely any one measure can shore up the system and still provide the same quality of life we've all been promised. However, saying they "do nothing" is entirely inaccurate.

When the president speaks of PRAs, he refers to a system in which participants invest part of what they already pay in payroll taxes, and in exchange the accounts replace part of their government/taxpayer-funded benefits. This creates a combined benefit.

For example, say Social Security promises a worker $1,500 a month at retirement. Under a leading reform plan, if the worker opts to divert 4 percentage points of his payroll tax into his personal account, he agrees to give up $300 a month in traditional government funded benefits. If his personal account earns 3 percent a year, this worker breaks even and earns $1,500 a month in retirement.

If the worker's investment earns a higher return, he earns a higher monthly benefit. The Social Security Administration says workers who invest 50 percent in stocks and 50 percent in bonds can expect a return of about 4.6 percent.

Over time, as workers with personal accounts retire, Social Security's obligations are reduced. Thus, Bush-style personal accounts alone will reduce Social Security's costs by about 10 to 15 percent over the next 75 years, and more than 20 percent beyond the 75-year horizon.

Of course, Mr. Bush's approach includes more than just adoption of PRAs. He has also noted the need for other measures, like curbing the growth of future government-provided benefits.

There are various ways to do this, such as changing how initial benefits are indexed. Mr. Bush recently endorsed a proposal by a Democratic member of his 2001 commission, Robert Pozen, to make this shift from wage to price indexing on a progressive basis, maintaining wage indexing for the lowest-paid workers.

Adopting both aspects, reducing government's burden and including PRAs will provide benefits comparable to what the system now promises and more than it actually can afford.

So why are we talking about PRAs? Anyway you look at it, every measure absent PRAs to shore up the $11 trillion debt can be boiled down to fewer benefits, more taxes, or a combination of the two.

PRAs offer the only chance for younger workers to gain anything from reform.