Common Sense on Social Security

A Centrist Perspective on the Social Security Reform Dilemma

Social Security Reform: Breaking the Stalemate

Section 7. The Conservative Morality Play

As they seek an appropriate response to the Social Security financing dilemma, the conservative camp consistently frames the issue in moralistic terms. In fact, the moral imagery is so strong that the conservative case for Social Security reform has become something of a late twentieth century morality play.

According to the conservative story line, the decision to set up Social Security as an inter-generational transfer payment system leaves each new generation worse off than its predecessors. Employee-paid taxes creep steadily higher; the rate of return on taxes paid sinks steadily lower. The Trust Fund has filled its portfolio with low-yield government IOU's, and when the Trust Fund finally needs to redeem these IOU's, the government will be forced either to raise taxes, borrow more money, or cut benefits. (In point of fact, borrowing more from one creditor in order to pay off a debt already owed to another is merely a refinancing, not new borrowing.) In their version of Social Security's insolvency melodrama, many conservatives have sought to create a public mood in which today's Social Security program is judged to be bankrupt not only financially but also morally and intellectually.

The morally correct way to solve Social Security's financial dilemma, say the conservatives, is through the creation of millions of Personal Retirement Accounts, each one the personal property of its owner. In contrast with today's program, such funds would be fully inheritable. A personal investment strategy is morally superior, conservatives say, because it trims the reach of the government and promotes individual control. Because they'd invest in stocks, PRA's would give employees a substantially higher return on the dollar than Social Security offers. With PRA growth fueled by the power of compound interest, today's younger employees can expect to find themselves in clover once they reach their retirement years.

One piece of legislation that attempts to translate the conservative morality play into practical public policy is the Kolbe-Stenholm-Breaux-Grigg proposal, named for the two Congressmen and the two Senators who have introduced it. The Kolbe-Stenholm proposal would finance the creation of PRA's by using what is called a "carve out" approach. Their bill carves out 2% of the payroll tax to finance PRA's, reducing the remaining payroll tax to 10.4%. The Kolbe-Stenholm plan also makes a series of deep cuts in the Social Security benefit structure, with higher income retirees targeted for the deepest cuts of all. By 2075, the Kolbe-Stenholm plan hopes to reduce Social Security's total obligations to retirees, survivors, and the disabled from 19.9% of taxable payroll to 11.32%, a whopping 43% reduction in the overall benefit schedule.

According to Kolbe and Stenholm, earnings from employee accounts should be sufficient to replace most of the benefit money that's cut by their bill. This seems unrealistic. PRA's at best can be expected to make up about three-fifths of the difference, leaving future retirees with an average benefit loss of at least 17%. Employees unlucky enough to retire at the end of a major stock market downturn will, of course, experience a somewhat more severe reduction in benefits.

Congressmen Bill Archer (R-TX) and Clay Shaw (R-FL) have taken another approach. (Bill Archer is the Chairman of the House Ways and Means Committee; Clay Shaw chairs its subcommittee on Social Security.) The Archer-Shaw proposal finances PRA's as an "add-on" to the existing payroll tax by retaining the current 12.4% combined rate, and then requiring employees to contribute an additional 2% for PRA's.

To compensate employees for the additional 2% cost of the Archer-Shaw PRA assessment, their bill would give each employee a full tax credit for every dollar paid into one's PRA. When employees retire, the Archer-Shaw plan expects them to convert their PRA assets into lifetime annuities. The size of each retiree's monthly PRA annuity payment will directly affect the amount he or she receives from Social Security. For each annuity dollar received by the retiree, a matching dollar will be subtracted from the retiree's Social Security check. Once the Archer-Shaw PRA program matures, in approximately four decades, the PRA contribution rate will be kept at 2%, the payroll tax will be cut from 12.4% to 10.4%, and the Archer-Shaw tax credit will be phased out. By the time the tax credit expires, its total cumulative cost will have risen to several trillion dollars.

Senator Kerrey has offered a small but interesting addition to the PRA menu. He would establish Personal Retirement Accounts right at birth for every American infant born in the new millennium, funded with a federal donation in the range of $1500 to $2500. The annual cost of Senator Kerrey's program might equal two-tenths of a percent of taxable payroll, or about $6 billion a year. From Social Security's perspective, Senator Kerrey's Birth PRA's wouldn't have a meaningful financial impact until the late 2060's, at which time they'd be valuable enough to permit a modest cut in the payroll tax.

(What makes Senator Kerrey's idea interesting to me is its motivational potential for America's youngsters, especially children from poor neighborhoods. If properly tweaked, Senator Kerrey's Birth PRA's might make a significant dent in the nation's high school dropout rate. Although it currently averages 25%, the dropout rate frequently exceeds 50% in poor neighborhoods. So why not tie a youngster's Birth PRA to his willingness to finish high school? When the child is born, endow him or her with a Birth PRA. Deposit $2,000 into the PRA at birth, thus giving each account a probable value of $100,000 at retirement. As the child grows older, the Birth PRA grows in value as well. But permanent ownership of the money isn't awarded until the young person earns his or her high school diploma. If a youngster drops out of school and turns 21 with no diploma, he forfeits his Birth PRA, which then reverts to Social Security's Trust Fund. The idea is to give all children, especially those from poor neighborhoods, a tangible incentive to stick to their studies and earn their diplomas. If young people see America betting on their future by endowing them with Birth PRA's, they'll take notice. Birth PRA's could be a wonderful statement of faith in all of America's children.)

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Revision Date April 13, 2006