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Merry Christmas.

Savings key to Social Security reform

By DYLAN GLENN

“ … a focus on essential priorities will also be crucial to the future of Social Security. As we continue to work together to keep Social Security sound and reliable, we must offer younger workers a chance to invest in retirement accounts that they will control and they will own.” — President George W. Bush, State of the Union Address, Jan. 28, 2003.

Conventional wisdom has been that politicians discussing reform of the nation’s Social Security system are doomed to electoral defeat. Long believed to be the dreaded “third rail” of American politics, any attempt at change was considered an exercise in political suicide. That this sentiment seems to be changing is not an accident. And it’s about time.

George W. Bush first ran on the issue of Social Security reform in 2000; he was re-elected last month having campaigned again on the issue. Voters were unmoved by old political tactics of demagoguery and inter-generational warfare. In a hopeful sign, they are realizing that the system is in trouble and demands sweeping changes.

“The time to fix the roof is when it’s not raining,” President John F. Kennedy would say. When it comes to our nation’s Social Security system, threatening storm clouds have gathered on the horizon.

Reform provides the only opportunity to avoid future shortfalls in revenues and eventual collapse of the system. It’s increasingly obvious that preserving the status quo is not a sustainable position or a viable option.

The major problem with the current system is structural. Designed as a “pay-as-you-go” system more than 65 years ago (meaning today’s workers contribute to support today’s retirees), demographic changes have made this an increasingly obsolete model.

For example, at the time of the adoption of the Social Security Act, the payroll taxes of roughly 42 workers supported the benefits of one single retiree.

Today, there are only three workers contributing per retiree. By 2030, the ratio will shrink to two workers to one retiree.

This reality suggests a demographic time bomb set to explode on future generations of workers.

Additionally, consider Americans’ increasing longevity. When Social Security was established, the life expectancy for the average citizen was 61 years. Today the average life expectancy has risen to 77.4 years.

This “graying of America” amounts to a serious challenge forcing benefits to be paid out over longer periods, which, obviously, places greater strain on the system in terms of costs.

One glaring exception is minorities. Social Security is particularly unfair in its treatment of African-Americans, who tend to have a shorter life expectancy when compared to their white counterparts.

The President’s Commission to Strengthen Social Security found that, “For black men age 20, only some 65 percent can be expected to survive to age 65. Thus, one of every three black youths will pay for retirement benefits they will never collect.” This is an example of the egregious failing of a program that relies on people dying young to maintain solvency.

Finally, a major problem facing the system is the impending retirement of the Baby Boom generation (born between 1946 and 1964). This group is estimated to number around 77 million with the first wave becoming eligible for Social Security benefits in four short years.

Social Security at its creation was never envisioned as more than a retirement supplement. The challenges to the program create an imperative for action. Restoring the program to a sound footing requires more than strong economic growth of the overall economy; its future rests in innovation and reform.

Clearly, with the explosion of new forms of investment (i.e., mutual funds, which enable small savers to “pool” their investments over a range of equities and bonds) any Social Security reform needs to include Personal Savings Accounts (PSAs).

The Investment Company Institute reports that there are more than 90 million individuals, representing 52 percent of all U.S. households, who own mutual funds today. The groundwork for working Americans to build their own retirements in the markets has already been laid.

PSAs would offer workers the opportunity to voluntarily divert a portion of payroll taxes into individual investment accounts. That would generate a greater return on investment.

Today, the return on investment for retirees amounts to less than 2 percent; conservatively managed PSAs could garner 5 percent or better. And unlike today’s system, those PSAs could be passed along to heirs.

The President’s Commission to Strengthen Social Security embraced PSAs in its final report, issued in December 2001, as a means for modernizing and restoring fiscal soundness to the system. The president has placed this component at the top of his agenda for reforming Social Security.

Personal Savings Accounts alone will not fix Social Security’s fiscal troubles, but it will help reduce the long-term cost of the program and create a new generation of investors.

In the near term, this could mean as much as $175 billion in new capital flowing into the markets. Even more important, it will go a long way to helping establish America’s new “ownership society.”

[Dylan Glenn is a senior fellow with the Georgia Public Policy Foundation, an independent think tank that proposes practical, market-oriented approaches to public policy to improve the lives of Georgians. Glenn previously ran for Congress from the Eighth District, which includes Fayette County.]