Linking Social Security and prosperity

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Today, Rep. Paul Ryan, Wisconsin Republican, will introduce as lead sponsor in the House the proposed Social Security Personal Savings and Prosperity Act of 2004.

The bill's reforms ultimately would dramatically increase the personal prosperity of American working people. For today's seniors, the bill provides the greatest possible chance to leave their children and grandchildren a legacy of personal prosperity and economic freedom.

Of course, the bill includes no change in Social Security for today's seniors or those near retirement. But workers 55 and younger could choose to devote an average of 6.4 percentage points of the current total 12.4 percent Social Security payroll tax to individually owned personal savings and investment accounts. They could put in the accounts roughly the amount in each paycheck's FICA box(somewhat more for lower-income workers and somewhat less for higher-income workers).

Benefits payable from the tax-free accounts would substitute for a portion of current Social Security benefits based on the degree to which workers exercised the account option over their careers. Workers exercising the personal accounts would receive Recognition Bonds guaranteeing them the payment of Social Security retirement benefits based on the past taxes they already paid into the program. Workers would then also receive the benefits payable through the personal accounts.

Workers choose investments by picking a fund managed by a major private investment fir, from a list officially approved for this purpose and regulated for safety and soundness, similarly to the operation of the Federal Employee Thrift Retirement System. This makes the system easy and manageable even for unsophisticated investors.

Apart from this personal account option, there would be no change in currently promised Social Security benefits of any sort, for today's seniors, or anyone in the future. Anyone who chooses to stay in Social Security would receive the benefits promised under current law. Survivors and disability benefits would continue as under the current system unchanged.

Indeed, the accounts are backed up by a continuing safety net guaranteeing workers would receive at least as much through the accounts as Social Security now promises.

The proposal has already been scored by the Chief Actuary of Social Security as achieving full and permanent solvency in the program, without any benefit cuts or tax increases. Indeed, the accounts would produce substantially more benefits for working people across the board than Social Security now promises, let alone what it can pay.

A recent study by Peter Ferrara, senior fellow at the Institute for Policy Innovation and director of the Club for Growth Social Security Project, showed personal accounts of this size invested half in corporate bonds and half in stocks earning standard long-term market investment returns would provide workers across the board with roughly two-thirds more benefits than Social Security promises but cannot pay. An account invested two-thirds in stocks and one-third in bonds would pay workers more than double what Social Security now promises.

Moreover, the chief actuary's official score shows that instead of ultimately increasing the payroll tax to more than 20 percent as would be needed to pay promised benefits under the current system, the tax would be reduced to 31/2 percent, enough to pay for all the continuing disability and survivors benefits. This would be the largest tax cut in world history.