by Rod D. Martin
January 30, 2004
In his State of the Union speech, President Bush courageously stood four-square once again for Social Security reform.
As almost everyone now admits, the system will likely collapse long before the last baby boomer retires. The doomsday clock starts ticking in 2014, when its surplus evaporates.
Politicians speak of a Social Security “trust fund,” as though your payroll taxes fill an account with your name on it. But no such animal exists. Were there one, why would there be any debate over whether your money will be there when you retire?
Truth be told, your Social Security taxes support today’s recipients. When you retire, tomorrow’s workers must support you.
But what if you’re a baby boomer? There are too many of you, and not enough of them. And boomers haven’t reproduced like their parents. In 1950, there were 13 workers available for every Social Security recipient. Now there are but three.
As former Democratic U.S. Senator Daniel P. Moynihan warned: “Unless we move boldly and quickly, [Social Security’s] promise to future retirees cannot be met without….benefit cuts, tax increases, or massive borrowing.”
Taxes have already skyrocketed. In 1937, the employee/employer rate was 2% on the first $3000 of income. Today, it’s 12.4% of the first $85,000 of income.
Social Security faces extinction; and that’s far from its only problem.
Social Security actually provides a negative return on your money once inflation is factored in. And it pays a paltry $255 death benefit, barely enough to buy a pine box. If the elderly face impoverishment, this is why.
It just gets worse and worse. You don’t actually own or control your money — your life savings — once it leaves your hands. Bureaucrats and politicians do. They treat it like their own private piggy bank. They raid the system’s surplus and splurge on pork. They even tax your benefits when you retire! What if you die first? They pocket the dough. Your heirs get nothing, no matter how needy they are, no matter what you wish.
Clearly, the President is right. Social Security cries out for dramatic reform.
That is why my Vanguard PAC, along with Jack Kemp, Grover Norquist’s Americans for Tax Reform and a host of other individuals and groups across our nation, has endorsed a far-reaching privatization plan developed by Peter Ferrera at the Institute for Policy Innovation.
Under our plan, workers gain back freedom of choice, ownership and control. They can choose to remain within the old system, or they can save and invest 5 percentage points of their 12.4% payroll tax (and 10% of their first $10,000 of income) in their own personal accounts, just like their current IRAs and 401(k)s. The plan provides today’s recipients — irretrievably trapped in the current system — the same benefits they get today, while guaranteeing new enrollees a minimum benefit equal to their share under the old system.
For workers who choose this new plan, the results could be spectacular.
How spectacular? One need only look to our sister countries who’ve already blazed this trail. In Chile — where a similar plan has been in effect for two decades — 95 percent of eligible workers have chosen to participate in private accounts, and the average Chilean today can expect to retire on more money than the average American worker. In Britain, where more than 73 percent of eligible workers now invest their payroll taxes in private securities, workers are averaging a 13 percent return (as opposed to between 1 percent and negative 1.5 percent in the U.S.). What’s more, Britain’s pension pool — worth over $1 trillion — is now larger than the pension funds of every other European nation combined.
The fact is, Americans put so much of their income into Social Security, and do it for such a large percentage of their lives, that even assuming extremely conservative returns and a relatively high rate of inflation, studies show that our system would provide most Americans a retirement income almost double their working-years salary. We could, in short, virtually eliminate poverty among the elderly.
Even more basically, though, our plan would actually save Social Security without cutting benefits or raising taxes. By triggering a massive shift of workers — and their retirement savings — out of the old system and into the new, privately-based one, it would transform not only our retirement system but our economy. It would eliminate Social Security’s $10.5 trillion unfunded liability, produce far higher returns, trigger a booming stock market — and overall economy – and even provide the opportunity for gigantic tax cuts.
But if we are ever to reform and save Social Security, now is the time. Over the next few years, as the system’s surplus grows, we will have a window of opportunity. Our current Social Security surpluses can help finance the transition costs. But time waits for no one. As the boomers begin to retire en masse, the window will slam shut by 2014.
Congress must follow the President’s lead and act now. The clock has almost run out.