- The Washington Times - Sunday, February 29, 2004

Last week, Federal Reserve Board Chairman Alan Greenspan gave the entire American political system a jolt in testifying before Congress that cuts in future Social Security benefits would be necessary to balance the federal budget over the long term. But, while Medicare and other federal entitlements are heavily overpromised, on Social Security the chairman is quite wrong.

The problem is that Mr. Greenspan has overlooked the power of a large personal account option for Social Security to cure the program’s problems without benefit cuts or tax increases. If workers are allowed to shift about half of the current Social Security payroll tax of 12.4 percent into such personal accounts, then ultimately the accounts would take responsibility for so much of future promised Social Security benefits that the program’s long-term deficits would be permanently eliminated.

The chief actuary of the Social Security System has officially scored a large personal account plan I authored for the Institute for Policy Innovation as achieving precisely this result. Indeed, the accounts are large enough that over the long run they would take responsibility for almost all of the current system’s retirement benefits, achieving vastly more than Congress ever could by trying to cut benefits.

This is now not a matter of conjecture, or opinion, but an established mathematical fact.

Moreover, the chief actuary found the personal account option in the IPI plan to be so attractive for working people that ultimately virtually all of them would exercise it. The study proposing the plan I authored for IPI showed, in fact, that at standard market investment returns the large accounts in the plan would provide workers across the board with about 60 percent more in retirement benefits than Social Security promises but cannot pay.

This is the way to reform Social Security. Far, far more can be accomplished through this means than by trying to cut Social Security benefits.

Unfortunately, some of the putative advocates of personal accounts are being sucked into the notion that Social Security reform is centrally about cutting future benefits. They have attended too many Beltway conferences where breast-beating policy analysts boldly urge political candidates to sally forth into real world campaigns with the message that Social Security benefits must be cut. The policy analysts, meanwhile, remain safely in the turrets of their think tanks admiring the polls they have told me about supposedly showing the public is panting away for Social Security cuts.

Marrying the negative message of cutting Social Security benefits to the positive message of personal accounts obscures all of the pro-prosperity and pro-liberty positives of the accounts. Opponents will focus on the benefit cuts and even blame them on the accounts. Indeed, that has already happened.

A supposed personal account reformer who goes on TV or radio talking about the need to cut future Social Security benefits is already discredited in the eyes of the audience. The audience will then thoroughly discount anything the advocate tries to say about the positives of personal accounts. Such advocates will only end up discrediting rather than promoting personal accounts.

Moreover, proponents of cutting Social Security benefits to close the system’s long-term financing gaps effectively promote a major tax increase as well. There is no way any substantial cut in future Social Security benefits is going to pass Congress on a partisan, party-line vote. Democrats will insist that any package to close Social Security’s long-term deficits will have to include at least half tax increases and half benefit cuts. Can we expect the Republicans to then stand firm against such an “even handed” deal.

It just makes no sense to spill heavy political blood fighting over what Social Security benefits should be in 2050 when, with large personal accounts, those benefits will never be paid. Instead, retirees would then be receiving much higher benefits through the personal accounts. It is far wiser to stay out of the benefit cut-tax increase swamp altogether.

We have a unique opportunity over the next two years for truly historic Social Security reform based on personal accounts. But if the advocates of the idea get sidetracked into supporting Social Security benefit cuts, they will fail.

Peter Ferrara is a senior fellow at the Institute for Policy Innovation and director of the Social Security Project for the Club for Growth.

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