President George W. Bush's pledge in his State of the Union
Address to make Social Security reform a priority is a welcome
step. For the first time, the President made clear that the
personal accounts he has described in the past should be financed
with a portion of workers' existing Social Security taxes. Without
this sort of real reform, younger workers face the prospect of
paying ever-higher payroll taxes for dwindling benefits. Personal
accounts are a way to avoid the looming Social Security crisis and
let workers create an asset that can be passed on to their children
and grandchildren.
The Coming Crisis
The President's commitment to reform Social Security by allowing
younger workers to invest a portion of their taxes in Personal
Retirement Accounts is a welcome step. That is the good news.
Although urged by many Republicans and Democrats either to quietly
drop the issue or limit his efforts to empty rhetoric, the
President made it clear that he is serious about dealing with
Social Security's coming fiscal crisis now.
This is very good news to millions of younger Americans, who
would otherwise face higher and higher taxes during their working
lives and smaller and smaller benefit checks during retirement. In
less than 15 years, Social Security's retirement program will begin
to spend more in benefits annually than it receives in taxes. It
has a drawer full of paper promises labeled the "trust fund", but
these are nothing more than a pledge to use ever-larger amounts of
general revenue taxes to pay benefits.
Essentially, anyone who is today age 50 or under can expect to
pay additional taxes totaling over $5 trillion so that Uncle Sam
can honor the trust fund promises. Sadly, in 2042, the drawer of
paper promises will be empty, and from that point on, promised
benefits will be cut - first by 27 percent and then by ever greater
amounts as Social Security's deficits grow larger. Without real
reform, anyone under the age of 28 today can expect to pay 100
percent of their Social Security taxes and 100 percent of their
share of the extra taxes to pay the trust fund promises only to
receive about 73 percent of the benefits that Social Security has
promised them.
The Hard Part
If the President's commitment to reform Social Security is the
good news, the bad news is that he has not said how he plans to
achieve this goal. As last year's experience with Medicare soundly
proved, declaring a goal is the easy part. Translating that goal
into an acceptable law that actually meets the objectives is much
harder and requires real presidential leadership.
Last year, the president limited his participation to a set of
general principles around which Congress was supposed to craft a
Medicare reform bill. Within a short time, meaningful reform had
been replaced by a new expanded entitlement that increased the cost
that younger workers will have to finance. Social Security reform
could face the same sad fate unless President Bush is willing to
state directly what he will and will not accept. Then he will have
to put the full prestige of his office behind those goals - and
even more importantly, against congressional efforts to duck the
hard decisions that will be needed.
Social Security reform will not be easy. Crafting a practical
personal retirement accounts plan will be as difficult as
assembling a spring wound clock, filled with gears of different
sizes that all have to fit together perfectly. It will be easy for
Congress to get sidetracked on fine-sounding but essentially
meaningless provisions such as the treatment of Social Security's
trust fund promises or the budget treatment of personal
accounts.
President Bush will have to know in detail how he wants to
reform Social Security. Then he and his staff will have to sell
those changes to both Congress and the American people. This will
be hard, slow work, but it is the kind of presidential leadership
that will be needed. President Roosevelt exercised that type of
leadership to pass Social Security in the first place, and it is
what this President demonstrated so effectively to change US tax
policy.
The Road Ahead
The first thing President Bush needs to make clear is that
fixing Social Security is not about mythical lock boxes or trust
fund accounting. Among the other factors that he must consider
are:
- The benefits of current retirees and those close to retirement
must not be reduced.
- The rate of return on a worker's Social Security taxes must be
improved.
- Americans must be able to use Social Security to build a nest
egg for the future that can be passed on to future
generations.
- Personal retirement accounts must guarantee an adequate minimum
income.
- Workers should be allowed to fund their Social Security
personal retirement accounts by allocating some of their existing
payroll tax dollars to them.
- For currently employed workers, participation in the new
accounts must be voluntary.
No other recent president has given personal retirement accounts
more than lip service and the President should be commended for the
goal he has set. However, younger workers cannot retire on fine
sounding phrases. Additional praise for this initiative should be
reserved until it is clear through unambiguous additional steps
that President Bush recognizes how much additional effort will be
needed, and has begun to take them.
David C. John is Research Fellow in Social Security and
Financial Institutions in the Thomas A. Roe Institute for Economic
Policy Studies at The Heritage Foundation.