McTHIRD WAY:

McCotter Trailblazes Social Security Prosperity (Peter Ferrara, 10.12.11, American Spectator)

Ultimately, as workers retire in the future relying on the personal accounts to finance the majority of their retirement benefits instead of the government, that will create enormous surpluses in Social Security. Under current law, those surpluses would flow back into general revenues, providing enough funding itself to cover all future personal account contributions to Social Security.

No change would be made in any way for those already retired today, or those anywhere near retirement. Each worker would be perfectly free to choose to stay with Social Security as is and forego the personal accounts entirely. There would be no change in Social Security benefits under current law for those who make this choice. But the Chief Actuary concluded that McCotter's accounts are so beneficial to workers that 100 percent of workers would choose the accounts.

The workers who do choose the personal accounts, however, would invest their funds by choosing from a range of privately managed investment funds, just as with the Federal Thrift Savings Plan for federal employees, or the Social Security personal account system adopted 30 years ago in Chile that has operated with such great success for the workers of that nation. Nearly 100 percent of workers chose the personal accounts in Chile, validating the Chief Actuary's judgment regarding the McCotter accounts.

To the extent a worker chooses the personal account option over his career, the personal account would finance an equivalent percentage of the worker's future Social Security retirement benefits. For a worker who exercises the account for his entire career, the account would finance the maximum of 50% of the worker's retirement benefits. For those who exercise the account option for fewer years and later in their careers, the account would finance proportionally less under a statutory formula. But the personal accounts will pay more than the amount of Social Security benefits they replace, leaving the retiree with higher benefits overall on net. There would be no change in Social Security survivors or disability benefits due to the McCotter accounts.

Workers who choose the personal accounts are backed by a federal guarantee that they will receive at least as much as promised by Social Security under current law, maintaining the social safety net of the current program. That is similar to the guarantee backing the personal accounts in Chile. That is workable because standard, long-term, market investment returns are so much higher than what completely non-invested, purely redistributive Social Security promises, that it is extremely unlikely after a lifetime of investment that the personal accounts will not be able to pay at least that much.

The bill was officially scored by the Chief Actuary of Social Security, with his scoring memorandum available on the Social Security Administration website. The Chief Actuary scores the bill as eliminating all future deficits of Social Security, with no benefit cuts or tax increases, assuring that all Social Security benefits will be paid. That is because the personal accounts finance so much of the future benefits of Social Security that future deficits between continuing payroll tax revenues and continuing benefit obligations of the program are eliminated entirely. The accounts are so powerful that they eliminate the future deficits in the disability portion of Social Security as well, even though no changes are made to disability benefits.

As a result, McCotter's bill involves no change in the Social Security retirement age, cuts in the Social Security COLA, or other benefit cuts promoted by other proposals. Workers with personal accounts choose their own retirement age themselves, rather than the government choosing for them, with the incentive to delay retirement to the extent feasible to allow further account accumulations. Some workers with mostly intellectual jobs may delay retirement well into their 70s, which could never be imposed politically otherwise. Other workers with more physically demanding jobs would still be perfectly free to retire in their early 60s.

Because long-term market investment returns are so much higher than what Social Security even promises, let alone what it can pay, future retirees will actually enjoy higher benefits with the personal accounts. With those returns accumulating over a lifetime, the personal accounts will finance higher benefits than the Social Security benefits they replace under McCotter's bill.

The bill involves the greatest reduction in government spending in world history, as the personal accounts take over the responsibility for financing through private personal savings and investment $8.555 trillion in future Social Security benefits, as scored by the Chief Actuary of Social Security. As a result, the Chief Actuary's score indicates that the bill eliminates entirely the unfunded liability of Social Security. Moreover, based on the Chief Actuary's score, the spending reductions to finance the accounts will add up to a minimum of another $3.75 trillion in savings, bringing the total reduced spending under the bill at a minimum to over $12 trillion. But block granting all remaining federal, means-tested welfare programs back to the states would likely save far more in future years than the $3.75 trillion needed to finance the transition to the personal accounts.

With the transition to the accounts funded by reduced government spending, there would be no transition debt at all. That means all of the savings and investment in the accounts would flow directly into the economy in full, boosting jobs, wages and economic growth today.

Posted by oj at October 12, 2011 2:58 PM
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