The Alternatives to Personal Retirement Accounts

1
The Alternatives to Personal Retirement Accounts
Social Security University February 21,
2003 Presented by Michael Tanner, Director of
Health and Welfare Studies Andrew G. Biggs,
Social Security Analyst The Cato Institute,
Washington, D.C. www.socialsecurity.org
2
Challenges Facing Social Security

• Its going broke Social Security will begin
  running payroll tax deficits within 15 years. By
  2041, it will be legally and financially unable
  to pay full promised benefits, resulting in cuts
  of 25 percent or more.
• Its unfair Social Security often discriminates
  against working women divorcees African
  Americans and younger Americans.
• It hurts wealth creation asset ownership brings
  a host of economic and social benefits. Social
  Security discourages saving by the poor, reducing
  wealth accumulation and increasing economic
  inequality.
• Its risky workers have no legal right to their
  benefits, even after a lifetime of contributions.
  The lack of a legal obligation encourages the
  government to make promises it cannot keep, and
  to delay action on reform.

3
Criteria for Reform

• Increase future economic growth In the future,
  smaller numbers of workers will need to support
  larger populations of retirees. Social Security
  can help make each worker more productive by
  raising national saving, thereby increasing
  worker productivity and boosting economic growth.
  
• Increase personal control Reform should be based
  on personal retirement accounts, which give
  workers true legal ownership of their retirement
  savings, prevent the government from raiding
  Social Security for other purposes, and give all
  Americans the opportunity to build wealth and
  pass it on.
• Increase fairness The current system can be
  unfair to African Americans, who often do not
  survive to retirement age to working women, who
  often do not receive spousal benefits and the
  young, who must pay high taxes into a system that
  will be insolvent by the time they retire. Reform
  should correct these flaws so all Social Security
  participants feel they are treated fairly.

4
Personal accounts basics

• Workers could invest part or all of their payroll
  taxes in accounts holding diversified stock and
  bond mutual funds. Higher returns on market
  investments would increase benefits for the
  worker.
• Workers choosing accounts would give up part of
  their traditional benefits. This offset would
  reduce pressure on the current systems finances,
  since it would have to pay out fewer benefits.
• At retirement, workers could purchase an annuity
  giving a guaranteed monthly income, or take
  gradual withdrawals of their money.
• If the worker died before the account was
  exhausted, the remainder would pass onto his
  spouse, children or a chosen charity.

5
Why do people oppose personal accounts?

• Some people oppose personal accounts. Many
  believe that
• Accounts are too risky
• Ordinary workers cant invest wisely
• Administrative costs would be too high
• Others oppose accounts on philosophical grounds.
  They are dedicated to the traditional program,
  even if it is going broke, and wish to see it
  continue in its current form.

6
Doing nothing is not an option

• Many honest people oppose personal accounts. Its
  not just politics.
• But rejecting accounts doesnt get you off the
  hook Social Security still needs to be reformed.
  One way or another, Social Securitys financing
  problems must be resolved.
• Responsible opponents of personal accounts have
  their own ideas.
• If we choose not to implement personal accounts,
  what are the other options open to us?
• What are the costs and benefits, and the risks
  and rewards, of these non-account reform
  proposals?

7
What are the alternatives?

• What do personal account opponents propose to do
  to fix Social Security?
• Most rely on combinations of tax increases and
  benefit reductions.
• Some would have the government invest the trust
  fund in the stock market.
• Many plans make the system solvent, if only
  temporarily.
• But none satisfy all the criteria for reform
  boosting economic growth, enhancing personal
  control, and increasing the fairness of the
  system.

8
The Clinton-Gore Plan

• Use Social Security surpluses to repay existing
  government debt.
• Credit the interest savings to the Trust Fund by
  issuing new bonds.
• These new bonds would keep Social Security
  technically solvent until 2055.

9
Issues with Clinton-Gore plan

• Debt reduction is a good thing but
• The Clinton-Gore plan uses Enron accounting
  the trust fund is already credited for reducing
  interest costs. Crediting it twice creates paper
  assets.
• Moreover, the trust fund would be credited with
  new bonds even if no government debt were repaid.
  
• Putting more IOUs in the fund doesnt solve the
  systems problems.

10
What the Experts Say About the Clinton-Gore
Proposal

• It would be tragic indeed if this proposal,
  through its budgetary accounting complexity,
  masked the urgency of the Social Security
  solvency problem and served to delay much-needed
  action I am very concerned that enhancing the
  financial condition of the trust fund alone
  without any comprehensive and meaningful program
  reforms may in fact undermine the case for
  fundamental program changes. Delay will only
  serve to make the necessary changes more painful
  down the road. The time has come for meaningful
  Social Security reform. The administration
  proposal does not represent a Social Security
  reform plan and does not come close to saving
  Social Security. GAO head David M. Walker.
• Adding to the trust fund balances does nothing
  to ensure that the necessary economic resources
  will be there to support the programs it simply
  shifts money from one government pocket to
  another. In fact, by relieving the most visible
  symptom of the programs fiscal distress,
  additional transfers from the general fund may
  lull the nation into overlooking the funds less
  obvious problems Plans that shift funds from one
  government pocket to another do nothing to
  address those programs actual financing
  problemand in fact could postpone corrective
  action. CBO Director Dan L. Crippen.
• The president also has a great deal of pain in
  his plan -- a hidden pain in the form of income
  tax increases that will be borne by future
  generations of Americans. I strongly disapprove
  of a plan that provides a false complacency that
  Social Security has been saved by this nebulous
  and vague idea of saving the surplus -- while
  failing to disclose the real pain that will be
  imposed on future generations. Former Senator
  Bob Kerrey (D-Neb)
• Its very complexity pretends to have done
  something for Social Security, and it weakens the
  demand for reform. Eugene Steuerle, senior
  fellow at the Urban Institute.
• The plan is not a solution to the question of
  paying for Social Security benefits. You have no
  fiscal discipline, you have no governing device
  on the program. It just becomes a black hole.
  Concord Coalition executive director Robert
  Bixby.
• The plan in no way reduces the rate of growth of
  benefits. It does not alter the economic burden
  on the system. It will have to be paid for, and
  it will be painful for future generations.
  Rudolph G. Penner, Urban Institute former
  director of the Congressional Budget Office.

11
Rep. Peter DeFazios Plan

• Tax Increase Lifts cap on payroll taxes, which
  currently apply only to first 84,900 in wages.
  12.4 percent tax would apply to all of workers
  wages, but workers wouldnt receive credit for
  extra taxes. A worker earning 150,000 would pay
  an extra 8,100 in taxes each year, but receive
  no extra benefits.
• Government Investment Requires the government to
  invest 40 percent of the trust fund in private
  stocks and bonds.
• Benefit Cuts Bases benefits on workers 38
  highest earning years, vs. 35 under current
  system.
• Tax exemption Exempts first 4,000 in wages from
  payroll taxes.
• Miscellaneous
• Increases benefits 5 percent for retirees over
  age 85.
• Allows parents three child care years without
  affecting their benefits.

12
Issues with DeFazio Plan

• Biggest tax increase in history, 1.2 trillion
  over ten years. Would raise the top federal tax
  rate to almost 55 percent, impacting economic
  growth and jobs. Combination of tax increase and
  4,000 exemption breaks link between
  contributions and benefits turning Social
  Security into a welfare program could hurt
  public support.
• Government investment risks political influence.
  Al Gore The magnitude of the governments stock
  ownership would be such that it would at least
  raise the question of whether or not we had begun
  to change the fundamental nature of our economy.
  Upon reflection, it seemed to me that those
  problems were quite serious. (New York Times,
  May 25, 2000)
• Child care credits disproportionately benefit the
  wealthy, who can afford to leave the workforce to
  raise kids. Lower-income parents must work.
• Not a permanent solution would keep Social
  Security solvent only until 2075, large deficits
  beyond that.

13
Henry Aaron and Robert Reischauer Plan(Brookings
Institution/Urban Institute)

• Tax increases
• Transfer around 100 billion of general revenues
  each year for the next 20 years.
• Increase payroll tax ceiling to cover 90 percent
  of wages (raises ceiling to approx 105,000).
• Government investment
• 20 percent of the trust fund in the stock market.
• Benefit cuts
• Increase the normal and the early retirement age
  to 67 and 64 by 2011, then increase annually for
  longevity.
• Make 85 percent of Social Security benefits
  subject to income taxes eliminate exemptions of
  25k for singles and 32k for couples.
• Reduce the spousal benefit from one-half to
  one-third of the primary earners benefit.
• Increase the benefit computation period from the
  35 to 38 highest earning years.

14
Robert Balls Maintain Benefits Plan(1994-96
Advisory Council on SS)

• Tax increases
• The maximum wage subject to payroll taxes would
  immediately be increased by approximately
  10,000. Beginning in 2050, the payroll tax rate
  would increase across the board by 1.6 percentage
  points.
• Benefit cuts
• Reduce annual cost of living increases.
• Increase the benefit computation period from 35
  to 38 years, or increase the current 12.4 percent
  payroll tax rates by 0.3 percentage points.
• Increase taxation of Social Security benefits
  phase out exemptions from taxation for low-income
  retirees.
• Government investment in the stock market
• Invest 40 percent of the Social Security trust
  fund in the stock market by 2014.
• Miscellaneous
• Force newly hired state and local workers into
  the system and redirect to the Social Security
  trust funds revenues from taxation of Social
  Security benefits currently going to the Medicare
  trust fund.

15
Robert Matsui 1990 Plan

• Invest Social Security surpluses in municipal
  bonds issued by states and cities.
• Trust Fund could purchase up to 25 of new
  municipal bonds issued.
• Since municipal bonds earn lower interest rates
  than the trust funds bonds, the investment would
  hurt Social Securitys financing.
• General revenues transfers would be required just
  to keep Social Securitys finances even, much
  less to move toward solvency.
• A new board would rate the municipal bonds
  value, giving Washington more power over
  state/local governments.
• Bonds would be for financing roads, bridges,
  schools, mass transportation systems, ports and
  water-treatment facilities. But many economists
  find these projects are less productive than
  market investments.

16
National Committee To Preserve Social Security
And Medicare

• Repeal tax cuts and use general revenues to
  supplement payroll taxes.
• Raise payroll tax cap to cover 90 percent of
  wages.
• Require all newly hired state and local workers
  to join Social Security system.
• Government investment of the Social Security
  trust fund in stocks should be seriously
  considered.

17
Dean Baker (Center for Economic and Policy
Research)

• Index payroll tax rates to increases in life
  expectancy or transfer general revenues to Social
  Security System.
• General revenue transfers can be supported by
  repealing tax cuts, increasing capital gains tax
  from 18 to 28, and imposing a .25 percent
  transaction tax on all stock transactions.
• Repeal payroll tax cap for employers portion of
  payroll taxes.
• Fully incorporate recent changes in CPI formula
  into Trust Fund projections.

18
Gary Burtless (Brookings Institution)

• Increase payroll tax by .8, divided equally
  between employer and employee.
• Increase the benefit computation period from 35
  to 38 years, reducing benefits for all new
  retirees.
• Require all newly hired state and local workers
  to join Social Security system.
• Fully incorporate recent changes in CPI formula
  into Trust Fund projections.
• Note this plan would not make Social Security
  solvent.

19
National Coalition Of Womens Organizations

• Increase payroll tax by 1.8 percentage points,
  divided equally between employer and employee.
• Repeal payroll tax cap.
• Government investment of 40 percent of Social
  Security Trust Fund.
• Note This is a very expensive plan. Plan creator
  agreed to have it scored by Social Securitys
  independent actuaries, but later refused to do so.

20
AFL-CIO

• Raise payroll tax cap to cover 90 percent of
  wages.
• Transfer general revenues to Social Security
  System.
• Consider allowing the federal government to
  invest a portion of Social security Trust Fund
  surpluses.

21
Summary

• It is possible to achieve solvency without
  personal accounts, and some non-account plans do
  so. However
• Many non-account plans dont reach permanent
  solvency, and some dont even extend Social
  Securitys life through 75 years.
• Non-account plans rely on tax increases and
  benefit reductions that most Americans oppose.
• Non-account plans dont give workers a legal
  right to their benefits, dont allow for
  inheritances and wealth-building, and do little
  to shield Social Securitys finances from raids
  to cover other spending.
• Non-account plans dont eliminate many of the
  unfair aspects of Social Securitys benefit
  structure that can disadvantage working women,
  divorced workers, younger workers and African
  Americans.
• But if these are the plans that personal account
  opponents favor, they should not be afraid to
  submit them for head-to-head debate.

22
Politics and Public Opinion On Social Security
Reform

• Social Security University
• February 21, 2003
• The Cato Institute, Washington, D.C.
• www.socialsecurity.org

23
There are some in government who advocate
changing the Social
Security system to give younger workers the
choice to invest a
portion of their Social Security taxes through
individual accounts
similar to IRAs or 401(k) plans. Would you...?
80
68.1
70
60
50
40
29.1
30
20
10
0
Total support
Total oppose
Zogby International, 2002
24
Support for Private Accounts (Various polling
studies, see Appendix A)
Zogby International, 2002
25
The Winston Group November 6-7, 2002
26
CNN/USA Today/Gallup Poll November, 2002
A proposal has been made that would allow people
to put a portion of their Social
Security payroll taxes into personal retirement
accounts that would be invested
in private stocks and bonds. Do you favor or
oppose this proposal?
70
57
60
50
40
40
Percent of respondents
30
20
10
3
0
Favor
Oppose
No opinion
27
Andres McKenna research The American Survey
January 6-7, 2003
Republicans in Congress will
60
49
50
40
32
Percentage of respondents
30
20
12
10
0
Bring too little change to Social Security
Bring the right amount of change to Social
Security
Bring too much change to Social Security
28
Los Angeles Times Poll Jan. 30Feb. 2, 2003Do
you approve or disapprove of George W. Bushs
proposal to allow individuals to divert part of
their Social Security payroll taxes into private
accounts which they could personally invest in
the stock market for their retirement?
80
Approve
73
Disapprove
70
Don't know
58
60
54
52
50
42
Percentage of respondents
40
37
40
30
20
20
7
10
6
6
5
0
All
Democrats
Independents
Republicans
29
There are some in government who advocate
changing the Social
Security system to give younger workers the
choice to invest a
portion of their Social Security taxes through
individual accounts
similar to IRAs or 401(k) plans. Would you...?
80
68.1
70
60
50
40
29.1
30
20
10
0
Total support
Total oppose
Zogby International, 2002
30
Zogby International, 2002
31
Zogby International, 2002
32
Which of these is the most important reason you
support individual accounts?
45
38.8
40
35
30
25.7
25
Percentage of respondents
20
15.6
14.4
15
10
4.2
5
0
Higher
People should
Money could be
I control money
Other
retirement
be allowed to
passed on
in my account
benefits
invest privately
Zogby International, 2002
33
Zogby International, 2002
34
With which statement do you most agree?A
Allowing workers the right to invest a portion of
their Social Security taxes would be too risky
because individuals might lose money if the
market performs poorlyB The current system is
more risky because the government cannot pay all
the benefits that it has promised.
100
90
80
70
60
Percent of respondents
50
44.6
43.7
40
30
20
10
0
Personal accounts more risky
Current system more risky
Zogby International, 2002
35
If Social Security taxes are invested in stocks,
bonds and money
market funds, who should do the investing?
70
62.0
60
50
40
Percent of respondents
30
22.4
20
10
0
Government should invest through a
Individual workers should invest in private
central fund
accounts
Zogby International, 2002
36
With which statement do you most agree? A The
Enron scandal shows the dangers of the stock
market and why we must maintain Social Security
as it is and not allow individuals to invest
their payroll taxes in personal retirement
accountsB The Enron scandal proves that people
need more choice and more control over their
retirement savings, including allowing workers
the option to invest part of their Social
Security taxes in a personal retirement account
70.0
63.6
60.0
50.0
40.0
Percentage of respondents
29.0
30.0
20.0
10.0
0.0
A
B
Zogby International, 2002
37
Base question
Zogby International, 2002
38
Does knowing this make you more or less likely to
support the plan to privatize Social
Security? Younger workers who invest a portion
of their Social Security taxes in individual
accounts will have to give up a portion of their
benefits under the current system.
Support conditions
14.4
4.0
The Supreme Court has ruled that you have no
rights to Social Security. In other words,
Congress is free to change or eliminate your
benefits at any time.
1.7
3.6
While plan will cost more in short run, it will
restore long-run solvency, increase benefits for
low-income widows and improve safety net for old
age poverty.
23.0
1.0
There will be no reduction in benefits for those
who stay with the current system.
8.6
0.6
10.0
5.0
0.0
5.0
10.0
15.0
20.0
25.0
Percentage of those somewhat/strongly opposed to
accounts in base
question shifting to more favorable position.
Percentage of those somewhat/strongly in favor of
accounts in base
question shifting to less favorable position.
Zogby International, 2002
39
Support Conditions
A candidate for congress says he wants to give
taxpayers ownership and control over their
retirement money. Does this candidates
position make you more or less likely to vote
for this candidate?
9.7
4.0
A candidate for Congress claims there is no
problem with Social Security. Does this
candidates position make you more or less likely
to vote for this candidate?
3.0
35.6
A candidate for Congress acknowledges problems
with Social Security, but has no plans to fix
it. Does this candidates position make you more
or less likely to vote for this candidate?
39.0
3.3
10
0
10
20
30
40
50
Percentage of those somewhat/strongly opposed to
accounts in base
question shifting to more favorable position.
Percentage of those somewhat/strongly in favor of
accounts in base
question shifting to less favorable position.
Zogby International, 2002