- The Washington Times - Sunday, January 9, 2005

Peter Wehner, a top aide to White House Political Affairs Director Karl Rove, last week sent a memo to conservative activists explaining administration thinking on Social Security. He wrote the key problem is that benefits are indexed to grow with wages over time, which causes Social Security benefit expenditures to grow faster than inflation. The solution, he argued, is to index program benefits to grow only with prices over time, a change known as price indexing.

In the key passage, he wrote, “You may know that there is a small number of conservatives who prefer to push only for investment accounts and make no effort to adjust benefits — therefore making no effort to address this fundamental structural problem. In my judgement, that’s a bad idea. We simply cannot solve the Social Security problem with Personal Retirement Accounts alone.”

That passage is in complete error, and explains why the White House staff has developed a Social Security plan for the president that is the political equivalent of the Charge of the Light Brigade.

First, large personal accounts like those proposed in legislation by Rep. Paul Ryan and Sen. John Sununu completely obviate the wage indexing issue and reduce future Social Security liabilities far more than price indexing would. That bill would allow workers to shift about half of the total Social Security payroll tax to personal accounts, with the accounts substituting for currently promised retirement benefits to the extent workers exercised the option over their careers.

Under the official score of the bill by the system’s chief actuary, virtually all Social Security retirement benefits would eventually be shifted to the personal accounts, where workers would actually get much better benefits than Social Security even promises today, let alone what it can pay. As a result, Social Security expenditures for retirement benefits would be reduced by 21 percent by 2030, by 40 percent by 2040, by 50 percent by 2045, by 67 percent by 2050, by 80 percent by 2056 and by 95 percent by 2078.

This approach allows advocates to focus exclusively on the positives of much better benefits for workers through personal accounts and personal ownership of hundreds of thousands of dollars accumulating in the accounts by retirement.

With Social Security liabilities shifted entirely to the accounts, there is no need at all for the negatives of the largest cut in future promised Social Security benefits in world history, which is what price indexing would constitute.

Price indexing, in fact, would cut future promised Social Security benefits for today’s young workers by between 30 and 40 percent. Taxes paid through the payroll tax would grow with wages, while future benefits would grow only with prices. Consequently, the miserable rate of return Social Security promises young workers today, even with the current wage indexing, would actually decline each and every year under price indexing, in perpetuity. All workers would eventually receive negative real returns from the program, getting more negative each year forever.

Under the current wage indexed system, the replacement rate, the percentage of preretirement income replaced by Social Security remains stable over time at about 40 percent for average-income workers and 28 percent for low-income workers. That is because incomes increase generally at the rate of growth of wages, and future retirement benefits do as well.

But with price indexing and incomes growing with wages but future benefits growing only with prices, the replacement rate declines each and every year, in perpetuity. Eventually, it would decline to 20 percent for today’s young workers, then continue down to 10 percent, 5 percent, etc.

This is all politically indefensible. Alfred Lord Tennyson wrote of the folly of the order for a direct charge of a British brigade into Russian fortifications during the Crimean War in 1857, which resulted in outright slaughter of the troops. In words that reflect the White House message on Social Security to conservative activists and Congressional Republicans, Tennyson wrote:

Not tho’ the soldier knew,

Someone had blundered,

Theirs not to make reply,

Theirs not to reason why,

Theirs but to do and die,

Into the Valley of Death.

The president should just propose the largest personal account he thinks the system can handle, with the goal of solving the problems of Social Security completely by eventually increasing the accounts to the full level proposed in Ryan-Sununu. That is a historic battle we all can win, to the great gain of working people, and the nation as a whole.

Peter Ferrara is a senior fellow at the Institute for Policy Innovation and director of the Social Security Project for the Free Enterprise Fund.



Click to Read More

Click to Hide