Life is really getting difficult for opponents of Social Security personal retirement accounts. Evidence continues to build that personal accounts – if properly implemented – will have none of the dire effects that opponents claim. It is becoming clear that the real trouble is trying to maintain the current system.
A recent General Accounting Office report outlined the problems with Social Security. The report notes that Social Security's long-term problems are larger than current estimates suggest. It also notes that the longer we wait to reform the system, the more difficult our choices become.
Using current estimates, Social Security faces a $25 trillion debt – that's the amount we'll have to raise over and above what we're scheduled to collect in Social Security taxes over the next 75 years. Raising payroll taxes by 50 percent or cutting benefits by a third – which would make the program solvent over the next 75-years – doesn't keep the program solvent for long, since Social Security's fiscal imbalance would worsen in the subsequent years, requiring deeper benefit cuts or even higher taxes. That's not a solution to the problem.
The GAO report did, however, examine a possible solution to this mess: the leading proposal offered by President Bush's Bipartisan Commission to Strengthen Social Security.
According to the GAO report, a reformed program as envisioned by the President's commission will require additional general revenues for about three decades. This additional revenue reflects the cost of transitioning from the current system to the new program – GAO estimates the reform plan will cost 20 percent more than the current system in the first year. However, with personal accounts, the cost over time declines dramatically. In fact by 2075, for example, the reformed plan would cost 40 percent less than the current system.
Additionally, GAO noted that median monthly benefits for those who chose individual accounts under the plan would be higher than the benefits Social Security can afford to pay. This is especially true for lower income workers.
The GAO report backs up the findings of a recent report by the Social Security Administration's Office of the Chief Actuary. The Social Security Administration found that a personal account plan like the Commission's, would pay higher benefits than the current system.
Most noteworthy, however, is the fact that the current system cannot pay all the benefits promised, even if it receives the same general revenue transfers required under the commission's plan to fund the transition to personal accounts – about $1 trillion in present value dollars. In most cases, low-wage workers in particular would earn substantially higher benefits than the current system promises, and much more than the current system can afford to pay.
How can personal retirement accounts do better than the current system? Bear in mind that the current system relies on the generosity of one generation to fund the benefits of another. As the number of people collecting benefit checks grows faster than the number of people funding them, the amount the government collects from each worker via payroll taxes, has to increase substantially. Otherwise, the system can't afford all it is promising to pay. If we maintain current tax rates, benefits will have to be cut by up to a third for future generations.
Personal retirement accounts, on the other hand, allow each worker to set some money aside to help make up for their smaller Social Security checks. And as the SSA and GAO show, workers who open these accounts will do better than the current system can afford to pay them.
For example, Social Security currently provides a rate of return on our contributed payroll taxes of 2 percent. If taxes are raised or benefits cut to close the program's funding gap, the return will get worse and worse.
By contrast, let's say we had created retirement accounts decades ago. How would a worker retiring last year have fared? Even with the 40 percent decline in the market between 2000 and 2002, a worker retiring in 2002 with a personal retirement account would have averaged a 7.3 percent rate of return on his account, compared with 2 percent under the existing Social Security system.
The evidence is in, and the proponents of saving Social Security with personal retirement accounts have won the intellectual argument. Now comes the tough part: the political argument with those who continue to protest in the face of the facts.