PreferredConsumer.com | Don't Just Buy. Know.

Face Reality, Embrace Social Security Reform

By Daniel J. Mitchell

(NUI) - President Bush has courageously endorsed a system of personal retirement accounts to strengthen and reform the Social Security system. The president's partisan opponents have denounced this idea, but it seems that they can't agree on why reform is a bad idea.

Some of them assert that Social Security is financially sound and that a few minor tweaks will keep the system healthy forever. Others admit that the program is bankrupt but argue that personal retirement accounts are the wrong solution.

But since none of the opponents is correct, this dispute is meaningless. Social Security is facing a serious crisis, and only personal accounts can save the system. Data in the recently released annual report of the Social Security Board of Trustees shows that President Bush has the right idea.

Myth: Social Security does not need reform -- Reality: According to the Annual Trustees' Report, Social Security's long-term unfunded liability (the gap between promised benefits and expected revenues) is more than $20 trillion ($80,000 for you and every member of your family). And that is after adjusting for inflation. Without changes, this would require a 50 percent increase in the payroll tax or a 30 percent cut in future benefits.
Myth: Faster economic growth will rescue Social Security -- Reality: Faster growth won't solve Social Security's long-term problems. It is true that a healthier economy will increase payroll tax revenues because workers will have more taxable income. But advocates of this approach conveniently forget to mention that workers become entitled to larger retirement benefits if they have higher incomes. Higher long-term spending offsets the additional short-term revenues if the economy grows faster.
Myth: Personal accounts are a risky and untested idea -- Reality: This is a rather bizarre assertion since several nations have shifted to personal retirement accounts. Australia, Chile, the United Kingdom, Hong Kong, Poland and Mexico are just a few examples.
Myth: Reform will increase the national debt -- Reality: This claim is sort of true. If workers are allowed to shift some of their payroll tax into personal accounts, the government will need to borrow a lot of money - perhaps more than $5 trillion - to make sure that current retirees and older workers receive their promised Social Security benefits. This will increase the national debt. But this additional debt is much less than the $20-plus trillion that the government will need to bail out the system if there is no reform.
Myth: The stock market is too risky -- Reality: Financial markets are risky for people looking to make a quick profit, but this has nothing to do with personal retirement accounts. A system of individual accounts would mean long-term investing. And stock market data clearly show that long-term investment is a sound strategy for building wealth.