Feature
The Road From Serfdom
Let workers choose: the New Deal, or a better deal?
ALSO IN CHOICE SYMPOSIUM
James Piereson
A Time for Choosing
Rep. Paul Ryan
Empowering Individuals or Bureaucrats?
David N. Bass
The Millennial Perspective
James Piereson
A Time for Choosing
Rep. Paul Ryan
Empowering Individuals or Bureaucrats?
David N. Bass
The Millennial Perspective
Conservative leaders—from Ronald Reagan and Newt Gingrich, to Tea Party Republicans who stormed the House in 2010—have been trying to reform and transform failed government programs for nearly two generations now, with only limited and frustrating progress. Republicans argue that the recipients of social spending will be better off under a conservative approach, but the public remains skeptical. Medicaid, Medicare, Social Security, public schools, and welfare programs might be run poorly, but they are a security blanket nonetheless. Voters don’t want to trade a devil they know for a devil they don’t.
Perhaps compulsion is the problem. The argument conservatives too often make seems to be: “Trust us; we know what’s best for you.” Yet when was the last time that voters trusted politicians of either party to make wise decisions on their behalf? With congressional approval now hovering in the teens, there is little likelihood the public will back fundamental reform of the $1 trillion entitlement system. But there is another way: Give individual citizens the freedom to either stick with the government-run plan, or choose a market-based option. Those who like Social Security and Medicare could keep them as they are. Those who think otherwise would have alternatives.
Just look at what happened when House Republicans proposed to fundamentally change Medicare and give seniors private insurance instead. Democrats ran TV ads—the campaign was dubbed “Mediscare”—telling seniors the GOP was trying to destroy Medicare. One commercial shows a man in a suit pushing the wheelchair of an elderly woman. The man leads her to the edge of a cliff and throws her off, while “America the Beautiful” plays in the background. Scary stuff.
But if Republicans gave seniors the choice, between the new Medicare and the old, could Democrats block that approach? Ultimately, we don’t think so. And political benefits are just the hors d’oeuvre. We also believe that choice-driven programs would achieve social-welfare goals more effectively, serve seniors and the poor far better, and cost just a fraction of what taxpayers pay for current programs.
Let’s examine how this model might apply. Baby boomers are now beginning to retire; eventually more than 75 million boomers will move onto Social Security and Medicare. For decades, the federal government’s own reports have shown that Social Security will be unable to pay boomers all promised benefits without dramatic, unsustainable tax increases. Medicare’s prospects are even worse.
Last year, Social Security ran an annual deficit for the first time since President Reagan and Congress raised the payroll tax back in 1983. Under government actuaries’ middling projections for economic and demographic growth, those deficits will continue until the Social Security trust funds run dry by 2037. After that, paying all the promised Social Security and Medicare benefits that are financed by the payroll tax will require almost doubling the tax from 15.3 percent today to nearly 30 percent.
Under more pessimistic growth projections, the Social Security trust funds will run out of money by 2029. In that case, paying all promised benefits to today’s young workers would eventually require a total payroll tax rate of 44 percent, three times current levels.
Social Security operates as a pure tax-and-spend system, so it has no real savings or investments anywhere. Even when it was running annual surpluses, close to 90 percent of the revenue that came in was paid out within the year. Remaining annual surpluses were lent to the federal government and spent on other programs, from foreign aid to bridges to nowhere. The Social Security trust funds received only internal federal IOUs, which promise the money will be paid back when it is needed for benefits. But those federal IOUs represent not savings, but actual additional liabilities for federal taxpayers.
Such a tax and redistribution scheme does not earn real market returns, as a fully-funded savings and investment system would. Consequently, over the long run the “trust fund” can pay only low, below-market benefits. Studies show that for most young workers today, even if Social Security does somehow pay all it has promised, those benefits would represent a real rate of return of around 1 to 1.5 percent, or less. For many, the effective return might even be negative. That’s like putting your money in a savings account, but instead of earning interest on it, you end up paying the bank for the pleasure of keeping your deposit there.
There is a better way. Workers could be empowered to save and invest the money they and their employers would otherwise pay into Social Security. Studies show that an average-income, two-earner couple would, over the course of their careers, accumulate close to a million dollars or more, given standard, long-term, market returns, and depending on what fraction of their Social Security contributions they are allowed to invest. Lower-income workers could regularly accumulate half a million dollars over their careers.
Those accumulated funds would pay all workers of all income levels and family combinations much higher benefits than Social Security even promises, let alone what it might pay. That includes one-earner couples with stay-at-home moms caring for the children. Retirees would be free to leave any portion of these funds to their children at death, further strengthening the family. Under Social Security, if you die, your heirs get a small death benefit, and Uncle Sam keeps the rest.
In retirement, benefits payable from a worker’s personal account would substitute for a portion of his regular Social Security benefits, based on the degree to which he exercised the account option over his career. This results in enormous reductions in government spending over time. The personal accounts wouldn’t just reduce the growth of government spending. They would shift vast realms of such spending from public sector taxes to private sector savings, investment, and insurance.
Workers could also freely choose what age to retire, since they finance their own benefits. The longer they wait, the more money the accounts accumulate, and the higher benefits those accounts can pay. Millions of workers with less physically taxing jobs could choose on their own to delay their retirements well into their 70s, a result that could never be imposed politically. Other workers whose jobs require heavy physical labor could choose to retire in their early 60s.
With stocks or bonds in their portfolios, workers would also look at the world differently. As capitalists and owners of American companies through their investments, workers would become advocates of pro-growth, free-market policies that make U.S. companies more profitable. The traditional friction between owners of capital and laborers would be diminished, because workers would have a stake in growth.
About the Author
Stephen Moore is a member of the Wall Street Journal editorial board.
About the Author
Peter Ferrara is Director of Entitlement and Budget Policy at the Heartland Institute, General Counsel of the American Civil Rights Union, Senior Fellow at the National Center for Policy Analysis, and Senior Policy Advisor on Entitlements and Budget Policy at the National Tax Limitation Foundation. He served in the White House Office of Policy Development under President Reagan, and as Associate Deputy Attorney General of the United States under President George H.W. Bush.
Letter to the Editor View all comments (10) | Leave a comment
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Mike Stein| 4.26.12 @ 5:57PM
Unfortunately there is a transition problem you haven't addressed. Since SS pays current retirees out of the the contributions of current workers, all the money going into private savings plans will no longer be available to pay those already retired, as well as those who are so close to retirement that they must be excluded from the plan (or would opt for the old system voluntarily) because they won't have enough working years left to accumulate an adequate private nest egg.
You write, "Even with the stock market crash, workers of all income levels and all races would have gained financially from private accounts and 40 years of compound interest, according to a study by Michael Tanner of the Cato Institute." But what about 20 years, or 10 years? What age would you set as your dividing line between people who _must_ go to the new plan, and people who may opt to stay under the old plan? The younger you set it, the less likely it is that a downturn will leave private account owners destitute - but the more retirees there will be who will expect traditional SS benefits after the SS tax stream has been cut off. Where does the money come to fund those benefits, since it's no longer coming from the SS payroll tax? I don't see how it's useful to eliminate the SS deficit by making a huge addition to the already large deficit in the non-SS budget.
Jacobite| 4.26.12 @ 8:00PM
The beeg mah-moo of Conservatism, Ronald Reagan, abolished exactly zero government programs or organizations. His administration was notable only for doing less damage than other administrations (GOP or Dem). And now someone thinks we are going to elect people who will do much, much more than Reagan? We can say there is no majority among current GOP officeholders to make any serious cuts in the entitlement programs that will sink the economy. And economics is only a secondary issue, as the Founders repeatedly said. The people's virtue is what held the Republic together. Know any Republicans out to fight the degenerates in our society? In Thomas Jefferson's Virginia, both blasphemy and sodomy were Common-Law crimes, possibly capital crimes. That's what they were talkin' about.
buckeyeman| 4.27.12 @ 12:11PM
Steve and Peter, I luv ya both, but I can't follow the reasoning in this lengthy article. We already have two alternate pathways to funding our own retirement. The first is to simply save our own money. Sure, its after tax money, but we can still save it instead of blowing it on lottery tickets, cigarettes, trips to Vegas, etc. The second alternate is the plethora of individual retirement accounts. Sure, they're complex, but not so much so that most people can't do them.
The real problem is redistribution of wealth, so why don't you just come out and say so. The idea that "we can run your socialist programs better than you socialists can" gets us into trouble all the time. Like most other "establishment" guys, you always seem to accept the premise that stealing my money to pay for something that somebody else wants is the proper role of the government.
You just can't tweak these programs, the numbers and human psychology just don't work. It never works. You two are smart enough to know this, so why did you write this article?
PattyMor| 4.27.12 @ 3:39PM
How are we going to get there with candidates like Romneycare Romney and the outright marxist, Barack Obama? I don't see either as reformers, but Romney will be the very best manager of the welfare state.
gigi0102 | 4.28.12 @ 8:28AM
For the last 20 years I've supported various versions of the private retirement accounts. Now I'm very near retirement and still stuck with Social Security -- a 15% tax, by the way, for the self-employed.
The private accounts are much better than the USA's ponzi scheme. Social "Security," actually is not at all secure -- eventually you run out of other peoples' money. We're just about there right now.
fiscal| 5.1.12 @ 6:42PM
When will you neocons start using data and analysis rather than ideology to come to appropriate conclusions. As has been noted earlier, your plan is nearly impossible to implement because Social Security is simply not funded -- it is paid for by younger workers. In addition, the law of unintended consequences will ensue as those with high incomes opt out of Social Security (because eventually there will be means testing) and the young will invest poorly (they always do) thereby putting an even larger strain on Social Security. Ideologically, I agree with your direction, but unfortunately, it has no chance of working because the numbers just don't add up.
In addition, you assume that future market growth will be the same as the past -- i.e., 7-8% per year. I believe that is a faulty assumption as past growth was fueled by a growing middle class and with increasing business productivity, the middle class is declining. So with the wealthy putting less into Social Security, the young investing in high risk and high failure markets which won't pay out for most of them, and the market not growing like the dotcom and housing markets (where most people previously increased their wealth -- but no more), you are going to cause an even greater failure.
A better alternative would be simply starting by means testing and raising the retirement age by a few years. Then over a period of 30 years or so, allow an increasing amount of social security funds to be self-directed -- sort of like a Medicare advantage plan for Social Security.
By the way, the average amount of Social Security collected by retirees in 2012 is just under $15,000 per year -- so it isn't even a good retirement plan right now. And your statement about SS funds not being available after one dies makes no sense because that is how insurance works. If those funds were available to someone's estate, the current "insurance rate" would have to be much higher than 15%. SS was never designed as an investment program -- it was always an insurance program. When you buy term life insurance you don't get your premiums back. If you want to buy whole life, where you do get your premiums back, it costs many times more for the same coverage. I can't believe two financial wizards like you don't understand the difference between insurance and investment.
And there is no chance any vote that has a chance of passing will ever come up on this issue because the senior vote is extremely important to Republicans to get re-elected -- much more important than to Democrats. That's why we need term limits for anything of value in solving the entitlements issue to get passed.
Donald Young's Revenge| 5.1.12 @ 9:48PM
Hey Stephen, Will there be anyone from the Wall Street Journal heading down to Phoenix, AZ anytime soon to cover the Sheriff Joe Arpaio criminal investigation. They have taken this investigation from "probable cause" to a "criminal" investigation. It is now in the 8th month and they are now convinced that Obama has been flaunting a forged birth certificate and a forged Selective Service card. The later carries a $250,000 fine and a 5 year prison sentence. There is more coming in the SECOND Press Conference, you guys missed the FIRST Press Conference (Why?) . This is the biggest scandal in the history of our country with tremendous ramifications and the Wall Street Journal misses the story completely. What they hell happened, you guys must be sleeping on the job.
POST American| 5.2.12 @ 3:38AM
---Deals imply a dealer and further
imply a casino which is a closed, and nearly
ALWAYS iself a 'fixed' system.
NO --NO ---NO!
Time to shed the Old Adam of the USURY
and EUGENICS money system and its
'fave' instrument of creep op CON--troll,
the 'benny violent' Social Darwinist
TAX FREE, unaccountable and undeniably
PSYCHOPATHIC capstone foundations.
------------THERE IS NO OTHER WAY--------------
---------------HUAC/ Nuremberg 2012----------------
Marc Jeric| 5.6.12 @ 1:09PM
If I had been free to invest my SS contributions plus what the company paid for me instead of giving me in salary, plus if i had not been forced to pay income taxes on my SS contributions, after 35 years of work I would have a capital of some $2.5 million to live on. Instead I get $1,400 a month.
Roy| 5.7.12 @ 7:55PM
For SS, this might work, but it can't for Medicare, can it?
It's ALWAYS going to be a better option for me to have the federal government pay all my bills with no questions asked than any other option. The ones that is bad for are the ones paying the bills.