- The Washington Times - Monday, June 4, 2001

President Bushs remarkably well-crafted Social Security Reform Commission will offer a far greater challenge to knee-jerk defenders of the status quo than they now realize. For if the personal account option they propose is designed well, it will involve a major increase in retirement benefits for working people, particularly lower income workers. Can liberals and Democrats really oppose that? The commission should focus on designing an option that is highly attractive for working people. The central truth that compels a personal account option for Social Security is that private investment returns are now so much higher than what Social Security promises, let alone what it can pay.
To ensure that workers can actually reap these benefits from the personal accounts, the commission must be careful in how it treats the Social Security benefits of workers who choose the accounts. A portion of those benefits are to be replaced by benefits from the personal accounts. If the portion of the current systems benefits to be replaced in this way is too large, however, then worker gains from the accounts will be lost. But if the portion to be replaced is too small, long term Social Security finances will suffer.
The best answer is to reduce future benefits from the current system for those who choose the accounts equivalently to the proportion of lifetime Social Security taxes the worker paid into the account. About 10 percentage points of the current Social Security tax goes to pay retirement benefits. If a worker paid 2 percentage points into a personal account each year for his entire career, his future benefits from the current system would be reduced by 20 percent. If the worker paid 5 percentage points into the account every year, that benefit reduction would be 50 percent.
Because the returns on the personal account investments will be so much higher than what Social Security promises or can pay, the personal account benefits replacing these Social Security benefits will leave workers with much higher retirement benefits overall. This would be true for all workers, including low income workers.
A progressive feature could be added to the plan, with the government adding to the contributions of the lowest income workers with some sort of match. Below certain family income levels, the government could contribute to each workers account perhaps an additional 50 percent of what the worker contributed from his or her Social Security taxes. This would result in an especially large increase overall in retirement benefits for low income workers, with a greater increase the larger the option is.
All of this must be backed up by a government guaranteed minimum benefit, promising workers with personal accounts that they would receive at least the same benefits overall as Social Security would pay. If the account at retirement is insufficient for some reason to at least cover the Social Security benefits it replaces, the government would make up the difference.
Another key question for the commission is how to finance the transition to personal accounts. While workers are shifting some of the payroll taxes into the accounts, the Social Security benefits of todays retirees must continue to be paid.
Mr. Bush has committed at least $1 trillion of the Social Security surplus, estimated at $2.6 trillion over the next 10 years, to the accounts. But critics have countered that depleting the surplus with the accounts means the Social Security trust funds would run out several years sooner.
Over the long run, the accounts would substantially reduce the financing gap of Social Security, as workers in the future relied on such personal accounts in place of part of their Social Security benefits. But a negative short term effect on the trust funds would leave the plan too vulnerable politically.
Fortunately, this short term effect can be completely avoided. Historically, Social Security surpluses were lent to the federal government in return for government bonds for the trust fund, and then spent on general budget items. Today, the surpluses are taken by the federal government again in return for government bonds, with the funds used to pay down outstanding federal debt.
When the surplus funds are used for personal accounts, the government should again provide government bonds to the Social Security trust funds in return. The account option would then not reduce the Social Security trust funds in any way, or reduce at all the funds available to pay current Social Security benefits. The option would simply reduce Social Securitys financing gap over the long run, with a bigger reduction the bigger the account option.
Finally, the commission should propose allowing workers to choose to contribute up to 5 percentage points of the Social Security tax to the personal accounts. The bigger the option, the bigger the increase in benefits for working people, and the more contributed under the government match to the accounts of the lower income workers. The entire package can be financed by devoting more of the Social Security surplus and the general budget surplus to the reform.
With these provisions, Mr. Bush would have a plan that increases benefits substantially for all working people, particularly low income people, with a government guaranteed safety net, while substantially reducing Social Securitys long term financing gap. Republicans and conservatives should confidently and aggressively promote such a pro-working people plan to the public, for it will prove politically irresistible.

Peter Ferrara is a senior policy adviser to Americans for Tax Reform on Social Security and research director for the For Our Grandchildren Campaign.

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