Start the Social Security Accounts, Larry Hunter, Peter Ferrara, Washington Times, 5-12-05

The Washington Times
Start the accounts
By Larry Hunter / Peter Ferrara
Published May 12, 2005

For decades, the federal government has raided the Social Security trust fund to finance other government spending. Social Security's surplus is taken each year to finance all the other federal programs, from foreign aid to welfare.

It is time to stop this inexcusable raiding, and give the surplus instead to workers to start their own, individual, personal accounts.

Indeed, the new bill introduced this year by Rep. Paul Ryan, Wisconsin Republican, and Sen. John Sununu, New Hampshire Republican, phases in the accounts so over the first 10 years the account option is half its full size, allowing workers on average to shift about 3.2 percentage points of the full 12.4 percent payroll tax to the accounts. The total annual Social Security surpluses projected over the next 10 years, counting tax revenues and interest on the trust fund bonds, is enough to finance this Ryan-Sununu option during that period.

Congress should consequently stop the raid on the Social Security trust funds and use the money to finance the first 10 years of Ryan-Sununu. The surplus would then finance the future retirement benefits of today's workers rather than other government spending. This is the only way to enact a true lockbox where the government can't get its hands on the money to fuel further runaway spending on other programs.

To free the surpluses for the accounts, Congress must reduce its spending at least by the surplus of Social Security taxes over expenditures each year. That money belongs to the future retirement of working people and Congress shouldn't be spending it anyway.

The government pays the interest on the Social Security trust fund bonds by issuing new bonds to the trust funds each year. To the extent needed to finance the Ryan-Sununu accounts for the next 10 years, those bonds would be issued instead to the accounts of each worker across the country. Workers would be free to choose to sell those bonds and invest the money in broader mutual funds if they desire. These bonds, of course, would not be new debt but rather money the government already owes to the trust funds under the current system.|

It would also be very desirable to phase in the Ryan-Sununu budget process reforms over the first 10 years as well, including a reduction in the rate of growth of federal spending by 1 percentage point a year for eight years. This would produce net surpluses from the reform in the first 10 years, and provide the foundation for expanding to the full Ryan-Sununu accounts after the first 10 years.

This reform would provide better benefits for working people from Day One, as the market returns earned by the accounts would be so much more than Social Security has even promised, let alone what it can pay. It would provide personal ownership and control for workers over their retirement funds, stopping the long practice of raiding the trust funds.

It would empower low- and moderate-income workers to accumulate substantial personal savings and wealth for the first time, which they can leave wholly or partly to their families by inheritance. It would greatly boost the economy through lower effective taxes and higher savings and investment.

Finally, even the smaller accounts adopted for the first 10 years would substantially reduce Social Security's long-term deficits, as the benefit obligations born by the old framework would be substantially reduced and taken up by the personal accounts. If the accounts were expanded after 10 years to the full Ryan-Sununu level of 6.4 percentage points on average, the long-term deficits would be ended, achieving permanent Social Security solvency. The chief actuary of Social Security has scored the Ryan-Sununu bill as achieving exactly this result.

This is achieved, moreover, without cuts in future promised benefits or tax increases. With better benefits to be provided in the future by the accounts in place of benefits financed by the old Social Security framework, there is no longer any need to talk about eliminating that old system's deficits via tax increases and benefit cuts. This seemingly simple point has proven difficult for many would-be reformers to understand.

Through this approach, therefore, we can focus on what Social Security reform should be about, providing a better deal for working people. Personal accounts as in the Ryan-Sununu bill, indeed, offer the chance for a historic breakthrough in prosperity for working people.

Larry Hunter is vice president and chief economist for the Free Enterprise Fund. Peter Ferrara is a senior fellow at the Institute for Policy Innovation and director of the Social Security Project for the Free Enterprise Fund.