- The Washington Times - Thursday, January 29, 2004

With the release today of the Cato Institute’s plan for a personal account option for Social Security, a new consensus has now been established among those advocating such reform. The Cato plan calls for allowing workers to shift into the account 6.2 percentage points of the 12.4 percent Social Security payroll tax.

A reform proposal published by the Institute for Policy Innovation, which I authored, called for allowing workers to shift 6.4 percentage points of the tax on average to the accounts. That plan has now been endorsed by a sweeping range of conservative organizations and leaders.

Consequently, the reformers are now basically united in asking for an account of just more than 6 percent. Accounts of that size, properly structured, would provide better benefits for all workers than Social Security promises but cannot pay, while eliminating the long-term deficits of that program as future benefit obligations are massively shifted to the accounts.

The Cato plan has some key features that can and should be adopted by all reform plans. Workers who exercise the account option should receive recognition bonds promising to pay them the proportion of future promised Social Security benefits they have already earned based on their past payments into Social Security. Such recognition bonds were utilized in the pathbreaking reform plan adopted by the South American nation of Chile over 20 years ago.

Another component of the plan that should be adopted by all others is the administrative framework designed by Bill Shipman, chairman of the Cato Project on Social Security Reform. That detailed framework was extensively researched and developed out of the direct experience of the financial community in administering similar accounts, and would keep administrative costs quite low.

But the IPI plan has key features that should be adopted as well. The plan has a progressive formula allowing workers to pay into the account 10 percentage points of the first $10,000 in wages each year, and 5 percent of taxable wages above that (6.4 percent on average). All workers under this plan would receive about the same percentage increase in benefits.

By contrast, a plan offering a straight 6.2 percent account contribution rate to all workers, with no progressivity, would produce a much larger percentage increase in benefits for higher income workers than lower income workers. Indeed, many lower-income workers would quite possibly see a reduction in benefits at the same time higher-income workers are receiving major increases. Investing only half of the Social Security payroll tax, these workers may well not be able to achieve at standard market investment returns what Social Security would pay them under current law.

Moreover, the IPI plan has been scored by the chief actuary of Social Security as eliminating future deficits without cutting benefits or raising taxes. That is, again, because the bigger accounts are able to eliminate the long-term Social Security deficits by themselves (along with the necessary transition financing in the shorter term).

Consequently, there is no need for plans with large accounts to include such politically intractable burdens as a 30 percent cut in future promised Social Security benefits. Indeed, that would only further contribute to lower benefits for lower income workers, even those with personal accounts, as they would lose some of the benefits they have already paid for through past payments into Social Security.

Moreover, liberals and Democrats will insist Social Security’s financing gaps must not be closed by benefit cuts alone. At least half they will insist must be covered by tax increases instead. Those who want to wade into this benefit cut swamp are consequently inviting a large tax increase.

Obviously, the now documented power of the accounts to eliminate future deficits is an enormous advantage that all advocates of the idea should be trumpeting.

Finally, the IPI plan provides for future reductions in payroll taxes that are split evenly between employers and workers. By contrast, providing all such future tax cuts only to employers would be seen as favoring big business.

Legislative drafting is already under way that will take the best features of all reform plans, including the Cato plan, and incorporate them into one unified plan. Advocates of reform should join together to advance such legislation within the administration and Congress.

Peter Ferrara was a senior staff member in the Reagan White House Office of Policy Development, and author of “Social Security: The Inherent Contradiction” (Cato Institute, 1980), and “A New Deal for Social Security” (Cato, 1998).

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