THEN RAISE RETIREMENT AGE AND INSTALL MEANS-TESTING ON REGULAR SS:

Social Security Personal Accounts Are A Path To Prosperity (Peter Ferrara, 10/06/11, Forbes)

Social Security operates as a pure tax and redistribution system, with no real savings and investment anywhere.  Even when it was running annual surpluses, close to 90% of the money coming in was paid out within the year to pay current benefits.  Even the remaining annual surpluses were not saved and invested.  They were lent to the federal government and spent on other government programs, from foreign aid to bridges to nowhere, with the Social Security trust funds receiving only internal federal IOUs promising to pay the money back when it is needed to pay benefits.  Those federal IOUs are rightly accounted for in federal finances not as assets but as part of the Gross Federal Debt, subject to the national debt limit.  That is because they do not represent savings and investment, but actually additional liabilities of federal taxpayers.

Such a pay-as-you-go tax and redistribution system does not earn the investment returns that a fully funded savings and investment system would.  Consequently, over the long run the system can only pay low, inadequate, below market returns and benefits.  That is why studies show that for most young workers today, even if Social Security does somehow pay all its promised benefits, those benefits would represent a real rate of return of around 1% to 1.5% or less.  For many, the real effective return would be zero or even negative.  A negative rate of return is like putting your money in the bank, but instead of earning interest on it, you have to pay the bank for keeping your deposit there.  That is effectively what Social Security is for many people today.

Moreover, on our present course, that is what Social Security will be for everyone in the future.  Whether the long term deficit is closed ultimately by raising taxes or cutting benefits, that will mean the effective rate of return from the program will be lower, ultimately falling into the negative range for everyone.

McCotter's bill provides a complete solution to these problems, benefiting both future seniors and taxpayers, based on proven reforms that have already worked in the real world.  The bill empowers each worker age 50 and below with the freedom to choose a contribution to a personal savings and investment account equal roughly to half of the employee share of the Social Security payroll tax.  That contribution would be financed by a payment each year from general revenues, with no reduction in the payroll tax revenues flowing into Social Security.  That avoids AARP's chief criticism of personal accounts: that they would drain from the program the funds needed to pay for today's benefits.

Each worker would be perfectly free to choose to stay with Social Security as is and forgo the personal accounts entirely.  There would be no change in Social Security benefits under current law for those who make this choice.  No change would be made in any way for those already retired today, or those anywhere near retirement.

Posted by oj at October 7, 2011 7:28 AM
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