They’re wrong. Congress would sell the Grand Canyon before it abandoned a tax-based retirement plan.
But social security will change, and this new report should jump-start the debate. The committee (it’s actually called the Advisory Council on Social Security) will put three proposals on the table, sharing one radical reform: they’d drop the rule that all your money has to be kept in Treasury bonds. Instead, some of it could go into stocks, to raise the return and make future benefits easier to pay.
How to integrate stocks, however, depends on what you think social security is for. Right now, it’s an income-insurance plan, a safety net under retirees, orphans, the widowed and the disabled. Some people get nothing from the system – say, workers without dependents who die before reaching retirement age. Others get huge payouts – long-lived retirees or young widows with children. Your benefit springs from your earnings and employment history, not on how much tax you paid.
Many reformers, however, want the program refashioned into an investment plan. They see the payroll tax as a kind of 401(k) contribution, on which you should expect to earn a decent return. On average, their payouts won’t be large compared with the size of the tax they pay. So you’re hearing demands – especially from higher earners – to privatize social security and let people invest their money themselves.
The three proposed plans have two more things in common. They all require higher taxes in some form, and they trim your social-security benefits in a variety of ways.
Plan One: let’s just tinker. Those behind this approach think that all we need are some housekeeping changes, such as making small cuts in benefits and raising the full-retirement age at a faster pace. This plan would also tax all of your social-security income, minus the payroll tax you paid. Up to 40 percent of social security’s surplus would go into stocks.
Plan Two: let’s save more. Payroll taxes would rise by 1.6 percent (all from the employees’ pocket). That money would fund a special social-security account, where you could pick investments from a list of indexed mutual funds. The current social-security plan would stay in place but with larger cuts, so it could be financed with the same amount of tax we pay today.
Plan Three: let’s reimagine the system. You’d get a low, flat benefit, funded by your company’s share of the payroll tax – say, $400 a month, compared with $537 for low-paid workers today and $1,248 for the highly paid. Your own share of the tax would go into a personal account at a financial institution. With modest luck, your investments would more than make up for the social-security cut. Today, your payroll tax finances payments to current retirees. This plan would finance them with a new national sales tax of 1 percent.
It will take a while for Americans to agree on a fix. Meanwhile, there are a lot of issues to consider.
What should social security cover? You’ll see calculations – from the Tax Foundation, from the Cato Institute – showing how much more you’ll have if you invest your own payroll tax. But part of that tax funds life insurance for a spouse with young children. The comparisons don’t consider the cost of replacing it. The Tax Foundation’s Arthur Hall says your gains on investment dwarf what the insurance offers. But not when you’re young and haven’t had much time to invest. Buying insurance yourself would leave you with less money to put into stocks.
Should divorced spouses be protected? Under social security, they can claim benefits on the strength of their ex’s account, if the marriage lasted at least 10 years. Their claim doesn’t lower the payment to the worker or the worker’s new spouse. Things would change, however, with a private retirement fund. The first spouse might get less; that payment would leave the worker worse off.
Should income be redistributed? Social security stacks the deck in favor of nonearning spouses and workers whose earnings are low. Under privatization, they’d be relatively worse off.
What’s the fallback position? Private accounts are a hazard to people who know almost nothing about stocks and bonds. If they lose important money, do we let them rot?
What if the stock market turns to worms? If you retired in October 1987, after the crash, your 401(k) would have bought a much smaller annuity than if you’d left a month earlier. A private account might still pay you more than social security could, but you never know. In 1928 the well-off wouldn’t have wanted the program, but they might have felt differently in 1931, says economist Barry Bosworth of the Brookings Institution.
I find myself in the “tinker” camp. Let’s put some of social security’s money into stocks, then distribute the gains in the traditional, safety-net way. The well-off own stocks already. It’s good policy to provide the rest with a decent retirement guarantee.
A move into stocks introduces a mess of technical problems. Who will manage the money and who decides? Should social security be a separate corporation, to distance itself from congressional guff? If you invest for yourself, what saves you from “respectable” swindles like the limited-partnership scams? What would this huge flow of funds do to securities prices – both stocks (probably up) and Treasuries? If social security buys fewer bonds, Uncle Sam will be peddling more of them to the public.
Whatever we do, our retirement is going to cost us more. It’s not a big deal to fix the present system and improve its investment return. But we have to decide what that system should be: a better investment for those who can afford the risk or a tax-supported minimum income, keeping us socially secure.
