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.
Personal accounts aren’t just a theory, either. About 30 years
ago, workers in Chile won just such freedom for their pension
contributions. In the first month, 25 percent of workers chose to
switch to the new personal account system. After 18 months, 93
percent of workers had switched. Within a few years, annual
economic growth soared to 7 percent, double the country’s historic
rate, while unemployment fell to 5 percent. After 20 years, the
enormous savings in the personal accounts totaled 70 percent of
GDP. Today, workers pay into the personal accounts half the taxes
required under the old system, yet they earn twice the benefits.
Chile’s reform has been recognized as such a success, that seven
other nations in Latin America have adopted similar plans. Other
such reforms have now flowered in Great Britain, Australia,
Hungary, and Poland.
But we don’t have to travel the world to find models for
personal accounts. In 1981, local government workers in and around
Galveston, Texas, voted to opt out of Social Security and into a
private savings and investment plan. The Thrift Savings Plan for
federal employees has also been popular and successful.
In 2005, Congressman Paul Ryan (R-WI) and Senator John Sununu
(R-NH) introduced comprehensive model legislation to provide a
personal account option for each American. The chief actuary of
Social Security officially scored this legislation as achieving
full solvency for the program, completely eliminating its deficits
over time without any benefit cuts or tax hikes. In fact, the chief
actuary recognized that future retirees with personal accounts
would earn higher benefits than under Social Security. He concluded
that 100 percent of American workers would choose the personal
accounts.
It’s true that George W. Bush fought to reform Social Security
in just such a manner, and was blown out of the water politically.
But that Bush plan was poorly formulated and executed. Further, one
of the talking points that sunk his proposal—the idea that stock
market volatility makes personal accounts unsafe—has now been
contradicted by real-world evidence. The 2008 financial meltdown
was about the worst imaginable scenario for those worried about
market volatility. But workers who retired in its immediate
aftermath still would have done much better with personal
portfolios than with Social Security. 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.
Of course, that doesn’t mean the left will oppose this plan with
any less ferocity. After all, what we propose is a frontal assault
against the modern-day entitlement system. Retired Americans would
no longer be wards of the state, waiting eagerly for their checks
each month, but would be instead financially self-sufficient. The
political hurdle is to convince seniors and those near retirement
that their benefits will not be cut, and that reform will offer
young workers a better deal and keep the retirement system solvent
for generations. We suspect that over time, most workers would
freely choose to own their retirement income and remove it from the
clutches of government control. What better way to break the back
of the modern welfare state?
