Tuesday, July 12, 2005

A coalition of House and Senate Republicans has transformed the Social Security debate with a new proposal that finally focuses reform on the personal accounts and sets aside all tax increases and benefit cuts. Skeptics take note: This bill can really pass. Nothing else can.

The bill is introduced this week in the House by four Ways and Means Committee members, Social Security Subcommittee Chairman James McCrery, Louisiana Republican, and Republican Reps. Paul Ryan of Wisconsin, Clay Shaw of Florida and Sam Johnson of Texas. House Policy Committee Chairman John Shaddegg of Arizona also is a co-sponsor, which reflects the support of the House leadership. The Senate bill is sponsored by a coalition of 11 senators led by Sen. Jim DeMint, South Carolina Republican.

The proposal is based on stopping Congress’ longstanding raid of the Social Security trust funds. Each year, the short-term Social Security surplus is taken by Congress and spent on other government programs. Social Security gets back these little IOUs that say Congress will return the money if the program ever needs it to pay promised benefits. This practice is greatly detested by voters.

To prevent Congress from continuing that practice, workers will be free to set up their own personal accounts, which will receive the cash surplus in Social Security each year. After the first couple of years, when they are limited to investing accounts only in government bonds, workers will be able to choose to invest in a range of stock and corporate bond funds, similarly to the Thrift Savings Plan for federal employees.

The accounts would then take responsibility for paying a proportionate share of future Social Security retirement benefits. Because of the higher market investment returns, this will leave workers slightly higher retirement benefits overall. The accounts taking responsibility for paying some of Social Security’s future retirement benefits, would reduce the program’s future financial burdens. The program’s future projected deficits would consequently be slightly reduced as well, starting us on the road to solvency.

Already polls show strong support for this idea. Dutko Research found the public favoring it 59 percent to 37 percent.

Other recent polls have shown support for personal accounts alone still around 50 percent. But a startling USA Today poll last week found 64 percent of the public opposing the president’s plan and only 31 percent favoring it.

We shouldn’t need a poll, however, to recognize it would sink the reform effort altogether for the president to wander off from personal accounts to talk about tax increases and reductions in future promised benefits.

One problem is the accounts would be small, only as large each year as could be financed with the surplus in Social Security taxes over expenditures. That surplus starts declining in only three years, then rapidly falls to zero in just over 10 years.

That can be solved by expanding the proposal to include the total Social Security surplus, which would include the interest the trust fund’s bonds earn each year. That interest is paid each year now by issuing the trust funds new bonds in the amount of the interest due. Those bonds could be issued to the accounts instead and workers could choose to sell them and invest more broadly.

This total Social Security surplus would finance a healthy personal account of 3.2 percentage points over the next 10 years, half the size of the full Ryan Sununu proposal. Such an account could then be extended permanently past the first 10 years, with the accounts financed from general revenues.

This would leave full payroll tax revenues flowing into Social Security. But the accounts would take increasing responsibility over time for paying future Social Security benefits, which is the key to real accounts as opposed to add-on accounts.

We can estimate the full effect by examining the Social Security chief actuary’s score of the Ryan Sununu plan. With payroll tax revenues maintained in full, but an account half the size of Ryan Sununu reducing future program expenditures by half the plan’s estimate, the 3.2 percent account would, in fact, eventually eliminate the Social Security deficit entirely, achieving full solvency. At the same time, through higher market investment returns, workers would actually enjoy significantly higher benefits from such a reform.

Peter Ferrara is a senior fellow at the Institute for Policy Innovation and domestic policy director for the Free Enterprise Fund.

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