The debate still rages over whether Social Security is broken and, if it is, how to fix it.
There is a simple solution.
The problem is described differently on both sides. Bush says that by the year 2017, “the system will start paying out more in benefits than it collects in payroll taxes. By 2041, Social Security will be bankrupt.”
His proposal for private accounts would not, he acknowledges, solve this problem in any way. His opponents say it would create two more large problems.
First, overhauling the system would cost trillions of dollars, which would have to be borrowed because there is no budgetary surplus.
Second, when Social Security stops creating its own surplus in 2017, it will run a deficit. That fund could plausibly last, by independent estimates, into mid-century. After that, the paying of benefits will only come from the taxes of those younger than retirement age. Working people will subsidize the retirement of their elders, in return for the same when they retire.
Private accounts would stop this entirely. The youngest workers, theoretically, would put enough into their personal retirement accounts to offset their own lack of benefits. But those who are only a decade or two from retirement, who have been paying for their elders’ retirement since they were young, will have no one to pay for theirs and will be unable to pay it themselves.
These two problems have a simple common solution. Bush proposed earlier this month to make the private accounts voluntary. If anyone wishes to participate, they pay into their own retirement accounts. If not, they can pay into the Social Security trust fund at large.
Bush’s proposal could be the solution, and he could also keep his edict against raising the payroll tax. All he has to do is allow the voluntary personal accounts to be a voluntary increase in an individual worker’s payroll tax.
Right now, 6 percent of a worker’s pay goes into Social Security and 3 percent from both employer and employee. Instead of stealing 4 percent from the 6 percent communal fund to put into a private account, why don’t we give workers an option to have an additional 2 percent withheld from their pay, and employers won’t even have to match it. This way they can then pay into private accounts as well as Social Security. When they retire, they will get benefits from both, just like Bush wants.
They will still be keeping the promise their elders demanded when they subsidized their own elders’ retirements. The trust fund will not go broke and private accounts will give a solid base to the stock markets. Everyone will be happy.
Bush also offered another choice at the same press conference. He proposed that private accounts could be invested in either high-risk stocks on Wall Street, or low-risk treasury bonds – the very same “junk bonds” Bush excoriated as having no worth last month. These bonds are safer investments than gold, and Bush knows it. The only way these bonds would remain unpaid is if the U.S. went bankrupt.
If a worker invested in the stock market instead of the treasury bonds that Social Security invests in, he would still be alright come retirement, supposing that the economy continues to do as well as its been doing. But if the economy continues to do as well as it has been doing, then Social Security will not go bust, due to the increase in wages (and payroll taxes) and there is no crisis.
Either solution, then, will work in a good economy. So what works in a bad economy? If the stock market tanks, like it did in the Great Depression, then “private account” retirees will retire broke and destitute, like they have been in Chile’s privatized retirement program right now. Social Security people, however, could still get their promised benefits, so long as we raise taxes.
Why don’t we do this voluntary tax increase for this voluntary aspect of the program, Mr. Bush, and solve everyone’s problems?
Chaelan MacTavish can be reached at [email protected]