The conventional wisdom in Washington, D.C., is that Social Security reform is dead. The surplus is gone and our attention has turned toward terrorism and national defense. However, as we'll see, the Social Security reform debate is about to heat up and the outcome will affect you – big time.
The panel of Social Security experts assembled by President Bush has been working feverishly since May to develop plans for saving the nation's retirement program. Their long-awaited recommendations have finally been submitted to the White House and the public.
Rather than propose one detailed plan, the commission suggested three alternative frameworks and will let Congress and the administration work out the fine print. Importantly, however, each of the three is built around the idea of allowing workers to invest a portion of their Social Security taxes in the market through a personal retirement account (PRA).
The first option integrates personal accounts into Social Security by allowing workers to invest 2 percentage points of their Social Security tax into their account. Unfortunately, however, it doesn't fully eliminate Social Security's long-term deficit because the program's deficits are so large they cannot be eliminated by PRAs alone.
Option Two would allow workers to invest 4 percentage points of their Social Security tax into an individual account. Future benefit increases would be tied to price inflation, rather than wages, which would slow the annual increase in benefit growth. Also, scheduled benefits for low-wage earners and surviving spouses would be increased.
Under Option Three, workers who invest 1 percent of their wages in a personal account could also invest 2.5 percentage points of their Social Security taxes. Benefit growth would be tied to life expectancy, and penalties for early retirement would be increased to encourage – but not force – people to work longer. In addition, benefits for higher-wage workers would be reduced, while and benefits for low-wage workers and surviving spouses would increase. Both Options Two and Three eliminate Social Security's long-term deficit and returns the program to surpluses.
The commission's critics immediately made the same tired arguments against the plans that they have always made against investment-based reform – namely, that the creation of personal accounts would require Social Security benefits to be cut. In fact, the complete opposite is true. Personal accounts are the solution to the deep benefit cuts that would otherwise be necessary.
Without personal accounts, Social Security benefits will almost certainly be cut. By 2016 Social Security will decline into debt and never return to the black. Between now and 2075 Social Security will be saddled with $22 trillion in debt, and it will continue to grow. The current system just can't afford to fully fund the promises it's making. To make ends meet, future retirees may face cuts of up to a third of their benefits – there's no security in that.
Personal accounts can help alleviate some of the long-term debt. The reason is simple. With PRAs, workers are forced to build a pool of savings that they will draw from to supplement their government-provided Social Security benefit at retirement. Since the government will not be required to pay the full amount of a worker's retirement benefit, it saves money over the long run. In fact under Options Two and Three, Social Security would see a return to annual surpluses in less than a generation- by 2058 for Option Two and 2062 for Option Three.
Personal accounts have higher short-term costs than the current system. But by 2030 to 2040, when workers with personal accounts begin retiring, this reformed system will permanently and forever become cheaper than the current one. By dealing with the costs now and reforming the system, the government will face smaller overall costs long into the future.
Not only will the system be saved, but future retirees will make out just fine. All three options considered by the commission would provide benefits equal to what today's retirees receive and increase it each year with the rate of price inflation. Thus, the buying power of today's retiree benefit will equal the buying power of retirees in every year from now on.
So what are we waiting for? The current system is clearly in trouble and the longer we wait the higher the costs will be – regardless of which path we choose. The commission's final report is just the first step in the long road to reform. While they may not be perfect, the three options provide a starting point for Congress and the public to begin a serious discussion about the future of Social Security. Better start paying attention, because the outcome will affect you and your children.