- The Washington Times - Tuesday, April 5, 2005

It is clear President Bush’s Social Security plan is not gaining political traction. Even many Republicans on Capitol Hill think the proposal is on life support.

One reason is Mr. Bush has not made some arguments that would buttress his case, such as how personal accounts would increase economic growth by expanding the labor supply.

Possibly the biggest macroeconomic problem with the current Social Security system is that it encourages workers to retire too early. Perhaps unwisely, most people start drawing benefits at age 62, the first moment they can, despite receiving 25 percent lower benefits for doing so.

Social Security rules effectively prohibit early retirees from working full time, because they lose 50 cents in benefits for each dollar of wages they earn above $12,000. There is no loss of benefits for those above the normal retirement age, which is 65 years and six months this year. However, the normal retirement age is rising to 67, meaning in future years more and more early retirees will lose benefits if they work.

I do not believe we as a society can afford to have so many well educated, experienced, highly skilled workers leave the labor force just so they can get their money’s worth out of Social Security. We don’t take private pensions away from those who continue working after they begin drawing benefits and we don’t penalize those with interest or dividend income well above $12,000. We only penalize those who want to work.

This may have made some sense in the 1930s, when the government was trying to create job openings for the unemployed. But today it is crazy. It is doubly crazy when research shows the key to living a long and healthy life is continuing to work in some way. More and more companies are now doing what they can to accommodate the needs of elderly workers because they view them as a valuable resource.

But as long as we have a Social Security system that actively discourages seniors from working, what businesses can do to make it worthwhile is severely limited.

Of course, one can always game the system. A friend of mine “retired” from his regular job a few years ago and went to work for his wife, who had a small antiques business. His former employer contracted with her company to do my friend’s job and she hired my friend to do the actual work. Her company was paid his old salary and she paid him the amount he could receive without losing Social Security benefits. In the end, my friend kept doing the same job for the same money, but in a rather roundabout way.

Not everyone has the flexibility or the resourcefulness of my friend and these face a difficult choice. They may want to work, but see it as a kind of tax if they don’t draw Social Security benefits as soon as they can.

Suppose someone has gross wages of $30,000 and $24,000 after tax from working, has just turned 62 and could make $12,000 tax free from Social Security for doing nothing. In his mind, his income from employment has just fallen 50 percent, because he would only lose $12,000 by quitting work.

One of the greatest benefits of a personal accounts-based Social Security system is workers would never face a use-it-or-lose-it decision. They would never forgo any benefits by continuing to work. They would just continue building wealth, providing more income when they do stop working or a nest egg that can be left to children or a spouse upon their deaths. Consequently, personal accounts will greatly increase work by the elderly by removing penalties for doing so.

New research by economists Alan Gustman of Dartmouth and Thomas Steinmeier of Texas Tech quantify the effect. They find adopting something like the Social Security Commission’s second option, which is very similar to what President Bush proposes, would reduce retirement at age 62 by 5 percent — a significant impact — by encouraging more seniors to stay in the labor force.

For one thing, the Social Security Commission proposal would change the indexing of initial benefits so they remain the same in real terms but not rise faster than inflation, as now happens. As a result, if the indexing formula is not changed (most Democrats changing it) the economic gain of Social Security reform will be substantially reduced.

So far, there has been almost no discussion of Social Security reform’s implications for economic growth. The benefits, however, may be large and are an important reason to act.

Bruce Bartlett is senior fellow with the National Center for Policy Analysis and a nationally syndicated columnist.

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