A private account would resemble an IRA or 401(k), except that you’d handle it through Social Security. You could choose among several different investments. Your long-term gains could potentially offset any cuts in Social Security benefits that Congress makes. Anyway, that’s what the boosters say.
Proposals for structuring private accounts are falling on Capitol Hill like leaves. Last week we heard from Reps. Bill Archer and Clay Shaw. In a complicated shuffle, they’d fund your account every year with money drawn from your income tax. Your future Social Security benefits would stay the same as they are now. But when you retire, those benefits would be paid, in part, from the gains that your private investments earned.
President Clinton took a different tack–proposing USA accounts for people with low and moderate incomes. The government would make an annual contribution to their accounts. They’d get additional matching funds if they contributed money, too. Clinton hasn’t specified how he’d fill Social Security’s long-term funding gap. Maybe he will, now that Congress is piping up.
In the Senate, a bipartisan group is thrashing out yet another idea. You’d have lower Social Security benefits but could grow a private account by investing 2 percent of your payroll tax.
Real life: No one can be sure how any of these plans would work in real life. But here are the questions being asked:
There are several ways to cover the transition costs. One way is by tapping the budget surplus (not the Social Security surplus, which is already spoken for, but the excess income-tax revenue expected by 2001). Another way is by borrowing money (future workers will pay the interest on the debt). If private accounts can raise the national savings rate, that would generate money, too. The economy would expand and tax revenues would rise.
When most people think about the gains they’d reap from private investment accounts, they don’t think about their transition costs. Nor should they, in the opinion of Peter Ferrara, an economist with Americans for Tax Reform in Washington, D.C., and a leading lobbyist for privatizing Social Security. Those aren’t your real costs, he says. By leaving them out, private accounts beat your returns from Social Security, by far.
Other analysts think it’s ridiculous not to count these costs. Two who have done so: Dallas Salisbury of the Employee Benefit Research Institute in Washington, D.C., and John Mueller, chief economist of Lehrman Bell Mueller Cannon, Inc., a financial forecasting firm in Arlington, Va. By their reckoning, Social Security is the better deal. The cost of shifting to private accounts is greater than your likely gains–not just at the start but for virtually everyone alive today. “Conservatives are torn,” says Mueller, a conservative himself. “Your libertarian ideology takes you one way, but the facts take you somewhere else.” (Daniel Mitchell, an untorn conservative at The Heritage Foundation, calls Mueller a “crackpot.”)
You may have a personal preference for one or the other of these dueling studies, but public policy isn’t made that way. If there’s a risk of doing harm, Congress will pause.
No problem: One reason people got interested in private accounts is that Social Security seems unable to pay in full, over the next 75 years. But Social Security’s trustees make three different forecasts. The one commonly used predicts a slowdown in real economic growth, from 3.9 percent last year to 1.2 percent in 2075–principally due to slower growth in the numbers of workers. In that case, a deficit occurs. The trustees’ stronger forecast, however, assumes that growth slows to just 2.1 percent. If so, there’s no Social Security problem. Even with fewer workers, the program could pay current benefits in full.
What might happen to private investment accounts if long-term growth slows down? Heritage predicts no change in returns from stocks. Mueller predicts that total returns from stocks would drop–making Social Security look better yet. No one knows which forecast is going to be right. But with everything so iffy, how radical a change in the program do you really want to make?
Salisbury thinks it’s shortsighted to think only about cash returns when asking if Social Security gives you your money’s worth. Thanks to this safety net, you don’t have to write a check to your parents every month. That’s worth something, too.
