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					  The Alternatives to Personal
     Retirement Accounts
          Social Security University
              February 21, 2003
                Presented by:
Michael Tanner, Director of Health and Welfare
                    Studies
   Andrew G. Biggs, Social Security Analyst
     The Cato Institute, Washington, D.C.
            www.socialsecurity.org
                                                 1
Challenges Facing Social Security
•It‟s going broke: Social Security will begin running payroll
tax deficits within 15 years. By 2041, it will be legally and
financially unable to pay full promised benefits, resulting in
cuts of 25 percent or more.
•It‟s unfair: Social Security often discriminates against
working women; divorcees; African Americans; and younger
Americans.
•It hurts wealth creation: asset ownership brings a host of
economic and social benefits. Social Security discourages
saving by the poor, reducing wealth accumulation and
increasing economic inequality.
•It‟s risky: workers have no legal right to their benefits, even
after a lifetime of contributions. The lack of a legal obligation
encourages the government to make promises it cannot keep,
and to delay action on reform.                                      2
               Criteria for Reform
•Increase future economic growth: In the future, smaller numbers of
workers will need to support larger populations of retirees. Social
Security can help make each worker more productive by raising
national saving, thereby increasing worker productivity and boosting
economic growth.
•Increase personal control: Reform should be based on personal
retirement accounts, which give workers true legal ownership of their
retirement savings, prevent the government from “raiding” Social
Security for other purposes, and give all Americans the opportunity to
build wealth and pass it on.
Increase fairness: The current system can be unfair to African
Americans, who often do not survive to retirement age; to working
women, who often do not receive spousal benefits; and the young, who
must pay high taxes into a system that will be insolvent by the time
they retire. Reform should correct these flaws so all Social Security
participants feel they are treated fairly.                               3
        Personal accounts basics
•Workers could invest part or all of their payroll taxes in
accounts holding diversified stock and bond mutual funds.
Higher returns on market investments would increase
benefits for the worker.
•Workers choosing accounts would give up part of their
traditional benefits. This “offset” would reduce pressure
on the current system’s finances, since it would have to
pay out fewer benefits.
•At retirement, workers could purchase an annuity giving a
guaranteed monthly income, or take gradual withdrawals
of their money.
•If the worker died before the account was exhausted,
the remainder would pass onto his spouse, children or a
chosen charity.                                               4
 Why do people oppose personal
          accounts?
Some people oppose personal accounts. Many believe
that:
•Accounts are too risky
•Ordinary workers can‟t invest wisely
•Administrative costs would be too high
Others oppose accounts on philosophical grounds.
They are dedicated to the traditional program, even
if it is going broke, and wish to see it continue in its
current form.


                                                           5
 Doing nothing is not an option
•Many honest people oppose personal accounts. It‟s
not just politics.
•But rejecting accounts doesn‟t get you off the
hook: Social Security still needs to be reformed.
One way or another, Social Security‟s financing
problems must be resolved.
•Responsible opponents of personal accounts have
their own ideas.
•If we choose not to implement personal accounts,
what are the other options open to us?
•What are the costs and benefits, and the risks
and rewards, of these non-account reform
proposals?
                                                     6
    What are the alternatives?
•What do personal account opponents propose to do to
 fix Social Security?
•Most rely on combinations of tax increases and
 benefit reductions.
•Some would have the government invest the trust
 fund in the stock market.
•Many plans make the system solvent, if only
 temporarily.
•But none satisfy all the criteria for reform: boosting
 economic growth, enhancing personal control, and
 increasing the fairness of the system.
                                                          7
      The Clinton-Gore Plan

•Use Social Security surpluses to repay existing
government debt.

•Credit the interest savings to the Trust Fund by
issuing new bonds.

•These new bonds would keep Social Security
technically solvent until 2055.




                                                    8
Issues with Clinton-Gore plan
Debt reduction is a good thing but…
•The Clinton-Gore plan uses “Enron accounting”:
the trust fund is already credited for reducing
interest costs. Crediting it twice creates “paper
assets.”
•Moreover, the trust fund would be credited
with new bonds even if no government debt were
repaid.
•Putting more IOUs in the fund doesn‟t solve the
system‟s problems.


                                                    9
 What the Experts Say About the Clinton-
             Gore Proposal
•“It would be tragic indeed if this proposal, through its budgetary accounting complexity, masked the urgency of
the Social Security solvency problem and served to delay much-needed action… “I am very concerned that
enhancing the financial condition of the trust fund alone without any comprehensive and meaningful program
reforms may in fact undermine the case for fundamental program changes. Delay will only serve to make the
necessary changes more painful down the road. The time has come for meaningful Social Security reform.” The
administration proposal “does not represent a Social Security reform plan and does not come close to “saving
Social Security.” GAO head David M. Walker.

•“Adding to the trust fund balances does nothing to ensure that the necessary economic resources will be there
to support the programs; it simply shifts money from one government pocket to another. In fact, by relieving
the most visible symptom of the program‟s fiscal distress, additional transfers from the general fund may lull
the nation into overlooking the funds‟ less obvious problems… Plans that shift funds from one government pocket
to another do nothing to address those programs‟ actual financing problem…and in fact could postpone corrective
action.” CBO Director Dan L. Crippen.

•“The president also has a great deal of „pain‟ in his plan -- a hidden pain in the form of income tax increases
that will be borne by future generations of Americans. I strongly disapprove of a plan that provides a false
complacency that Social Security has been „saved‟ by this nebulous and vague idea of saving the surplus -- while
failing to disclose the real pain that will be imposed on future generations.” Former Senator Bob Kerrey (D-Neb)

•“Its very complexity pretends to have done something for Social Security, and it weakens the demand for
reform.” Eugene Steuerle, senior fellow at the Urban Institute.

•The plan “is not a solution to the question of paying for Social Security benefits. You have no fiscal discipline,
you have no governing device on the program. It just becomes a black hole.” Concord Coalition executive director
Robert Bixby.

•The plan “in no way reduces the rate of growth of benefits. It does not alter the economic burden on the
system. It will have to be paid for, and it will be painful” for future generations.” Rudolph G. Penner, Urban
Institute; former director of the Congressional Budget Office.                                                        10
        Rep. Peter DeFazio‟s Plan
Tax Increase: Lifts “cap” on payroll taxes, which currently apply
only to first $84,900 in wages. 12.4 percent tax would apply to all
of worker‟s wages, but workers wouldn‟t receive credit for extra
taxes. A worker earning $150,000 would pay an extra $8,100 in
taxes each year, but receive no extra benefits.
Government Investment: Requires the government to invest 40
percent of the trust fund in private stocks and bonds.
Benefit Cuts: Bases benefits on worker‟s 38 highest earning years,
vs. 35 under current system.
Tax exemption: Exempts first $4,000 in wages from payroll taxes.
Miscellaneous:
•Increases benefits 5 percent for retirees over age 85.
•Allows parents three child care years without affecting their
benefits.                                                             11
           Issues with DeFazio Plan
•Biggest tax increase in history, $1.2 trillion over ten years. Would raise
the top federal tax rate to almost 55 percent, impacting economic
growth and jobs. Combination of tax increase and $4,000 exemption
breaks link between contributions and benefits; turning Social Security
into a “welfare” program could hurt public support.
•Government investment risks political influence. Al Gore: “The
magnitude of the government’s stock ownership would be such that it
would at least raise the question of whether or not we had begun to
change the fundamental nature of our economy. Upon reflection, it
seemed to me that those problems were quite serious.” (New York
Times, May 25, 2000)
•Child care credits disproportionately benefit the wealthy, who can
afford to leave the workforce to raise kids. Lower-income parents must
work.
•Not a permanent solution; would keep Social Security solvent only until
2075, large deficits beyond that.                                             12
  Henry Aaron and Robert Reischauer Plan
               (Brookings Institution/Urban Institute)
Tax increases
•Transfer around $100 billion of general revenues each year for the next
20 years.
•Increase payroll tax ceiling to cover 90 percent of wages (raises ceiling to
approx $105,000).
Government investment
•20 percent of the trust fund in the stock market.
Benefit cuts
•Increase the normal and the early retirement age to 67 and 64 by 2011,
then increase annually for longevity.
•Make 85 percent of Social Security benefits subject to income taxes;
eliminate exemptions of $25k for singles and $32k for couples.
•Reduce the spousal benefit from one-half to one-third of the primary
earner‟s benefit.
•Increase the benefit computation period from the 35 to 38 highest
earning years.
                                                                                13
   Robert Ball‟s “Maintain Benefits” Plan
                (1994-96 Advisory Council on SS)
Tax increases
•The maximum wage subject to payroll taxes would immediately be
increased by approximately $10,000. Beginning in 2050, the payroll tax
rate would increase across the board by 1.6 percentage points.
Benefit cuts
•Reduce annual cost of living increases.
•Increase the benefit computation period from 35 to 38 years, or
increase the current 12.4 percent payroll tax rates by 0.3 percentage
points.
•Increase taxation of Social Security benefits; phase out exemptions
from taxation for low-income retirees.
Government investment in the stock market
•Invest 40 percent of the Social Security trust fund in the stock market
by 2014.
Miscellaneous
•Force newly hired state and local workers into the system and redirect
to the Social Security trust funds revenues from taxation of Social
Security benefits currently going to the Medicare trust fund.              14
         Robert Matsui 1990 Plan
•Invest Social Security surpluses in municipal bonds issued by states
and cities.
•Trust Fund could purchase up to 25% of new municipal bonds
issued.
•Since municipal bonds earn lower interest rates than the trust
fund‟s bonds, the investment would hurt Social Security‟s financing.
•General revenues transfers would be required just to keep Social
Security‟s finances even, much less to move toward solvency.
•A new board would rate the municipal bonds‟ value, giving
Washington more power over state/local governments.
•Bonds would be for financing roads, bridges, schools, mass
transportation systems, ports and water-treatment facilities. But
many economists find these projects are less productive than
market investments.
                                                                        15
  National Committee To Preserve
   Social Security And Medicare
•Repeal tax cuts and use general revenues to
supplement payroll taxes.

•Raise payroll tax cap to cover 90 percent of wages.

•Require all newly hired state and local workers to
join Social Security system.

•Government investment of the Social Security trust
fund in stocks should be “seriously considered.”


                                                       16
                  Dean Baker
     (Center for Economic and Policy Research)

•Index payroll tax rates to increases in life
expectancy or transfer general revenues to Social
Security System.
•General revenue transfers can be supported by
repealing tax cuts, increasing capital gains tax from
18 to 28%, and imposing a .25 percent transaction
tax on all stock transactions.
•Repeal payroll tax cap for employer‟s portion of
payroll taxes.
•Fully incorporate recent changes in CPI formula into
Trust Fund projections.
                                                        17
                 Gary Burtless
                (Brookings Institution)

•Increase payroll tax by .8%, divided equally
between employer and employee.
•Increase the benefit computation period from 35 to
38 years, reducing benefits for all new retirees.
•Require all newly hired state and local workers to
join Social Security system.
•Fully incorporate recent changes in CPI formula into
Trust Fund projections.
•Note: this plan would not make Social Security
solvent.

                                                        18
     National Coalition Of Women‟s
             Organizations
•Increase payroll tax by 1.8 percentage points,
divided equally between employer and employee.
•Repeal payroll tax cap.
•Government investment of 40 percent of Social
Security Trust Fund.
•Note: This is a very expensive plan. Plan creator
agreed to have it scored by Social Security‟s
independent actuaries, but later refused to do
so.



                                                     19
                AFL-CIO
•Raise payroll tax cap to cover 90 percent of
wages.
•Transfer general revenues to Social Security
System.
• Consider allowing the federal government to
invest a portion of Social security Trust Fund
surpluses.




                                                 20
                         Summary
•It is possible to achieve solvency without personal accounts, and
some non-account plans do so. However…
•Many non-account plans don‟t reach permanent solvency, and some
don‟t even extend Social Security‟s life through 75 years.
•Non-account plans rely on tax increases and benefit reductions
that most Americans oppose.
•Non-account plans don‟t give workers a legal right to their
benefits, don‟t allow for inheritances and wealth-building, and do
little to shield Social Security‟s finances from “raids” to cover
other spending.
•Non-account plans don‟t eliminate many of the unfair aspects of
Social Security‟s benefit structure that can disadvantage working
women, divorced workers, younger workers and African Americans.
But if these are the plans that personal account opponents favor,
they should not be afraid to submit them for head-to-head
debate.                                                              21
Politics and Public Opinion On Social
           Security Reform

          Social Security University
             February 21, 2003

     The Cato Institute, Washington, D.C.
             www.socialsecurity.org




                                            22
     There are some in government who advocate changing the Social
       Security system to give younger workers the choice to invest a
      portion of their Social Security taxes through individual accounts
                similar to IRAs or 401(k) plans. Would you...?
80
                  68.1
70

60

50

40
                                                          29.1
30

20

10

0
               Total support                            Total oppose
                                                            Zogby International, 2002
                                                                                        23
                                       Support for Private Accounts
                                      (Various polling studies, see Appendix A)


80
                                                                                                                                                      68
70
                   66                       65                                                                              66
                               64                                  63       62 64 63                             63
       61
60                                                     58                                                                        57
              55                                                                                             55                         50
                        55                                      52         53                                                                     52
50                                     51        53                                                46
                                                                           46                                           48
                                                                45                                                                                45
                                                 39                                                45 40                42              43
40
              35                       36                                     34                                                 39
                        31                                 35                                  33                 33
30                                                                    30
     29                       31            30                                       31                                                          29
                   28                                                                                                        25
20
                                                                                                                                       Favor
10                                                                                                                                     Oppose

0
                                                      Oct-00




                                                                                                                                             Jul-02
                                                                            Aug-01
                             May-00




                                                                 Mar-01




                                                                                                        Mar-02

                                                                                                                   May-02
               Jan-99




                                        Jun-00




                                                                                          Jan-02




                                                                                                                              Jun-02
     Feb-98




                                                                                                             Zogby International, 2002
                                                                                                                                                           24
                                          The Winston Group: November 6-7, 2002

                              "Support a system in which you own and control how a part of your
                                              Social Security money is invested"
                         90
                                79                                                    Support
                         80
                                                69                                    Oppose
                         70                                       65
Percent of respondents




                         60                                                 54                  53
                         50
                                                                                 41       39
                         40
                                                                       32
                         30                          26
                                     19
                         20

                         10

                          0
                                18-34            35-44            45-54     55-64           65+
                                          Eligible for accounts             Protected against any
                                                                                  changes


                                                                                                     25
                                 CNN/USA Today/Gallup Poll: November, 2002

“A proposal has been made that would allow people to put a portion of their Social
         Security payroll taxes into personal retirement accounts that would be invested
                              in private stocks and bonds. Do you favor or oppose this proposal?”

                         70

                         60           57
Percent of respondents




                         50
                                                               40
                         40

                         30

                         20

                         10
                                                                                        3
                         0
                                     Favor                  Oppose                  No opinion

                                                                                                    26
Andres McKenna research: The “American Survey” January 6-7, 2003



                                                 Republicans in Congress will…
                             60

                                            49
                             50
 Percentage of respondents




                             40
                                                                      32
                             30


                             20
                                                                                                 12
                             10


                              0
                                  Bring too little change   Bring the right amount of   Bring too much change
                                   to Social Security       change to Social Security      to Social Security
                                                                                                                27
                                         Los Angeles Times Poll: Jan. 30—Feb. 2, 2003
 “Do you approve or disapprove of George W. Bush’s proposal to allow individuals to divert part of their
Social Security payroll taxes into private accounts which they could personally invest in the stock market
                                           for their retirement?”



                               80
                                                                   Approve          73
                                                                   Disapprove
                               70                                  Don't know
   Percentage of respondents




                               60                         58
                                    54
                                                                      52
                               50
                                                                           42
                                          40
                               40                    37


                               30

                                                                                         20
                               20


                               10                6                              6              7
                                                               5

                                0
                                         All %       Democrats %    Independents % Republicans %
                                                                                                             28
     There are some in government who advocate changing the Social
       Security system to give younger workers the choice to invest a
      portion of their Social Security taxes through individual accounts
                similar to IRAs or 401(k) plans. Would you...?
80
                  68.1
70

60

50

40

                                                          29.1
30

20

10

0
               Total support                            Total oppose
                                                            Zogby International, 2002
                                                                                        29
                                 There are some in government who advocate changing the Social
                                   Security system to give younger workers the choice to invest a
                                  portion of their Social Security taxes through individual accounts
                                            similar to IRAs or 401(k) plans. Would you...?
                            90
                                   82.8
                                                     76.4                                           Support
                            80
                                                                                                    Oppose
Percentage of respondents




                            70                                             64.4
                            60                                                                    54.5
                            50
                                                                                                         39.6
                            40
                                                                                  33.3
                            30
                                                            21.9
                            20            16.2

                            10

                             0
                                     18-29             30-49                 50-64                    65+
                                                               Age Group
                                                                                         Zogby International, 2002
                                                                                                                     30
                                  There are some in government who advocate changing the Social
                                    Security system to give younger workers the choice to invest a
                                   portion of their Social Security taxes through individual accounts
                                             similar to IRAs or 401(k) plans. Would you...?
                             90
                                                82.1
                                                                                                                              Support
                             80                                                                                                                          75.7
                                                                                                71.9                          Oppose
Percentage of Participants




                                                                67.4               68.4                                                                                      68.5
                             70                                                                                             63.6
                                  56                                                                            58.2                      56.6
                             60

                             50
                                         40.3                                                                          38.6                       40.7
                             40                                             31.1                                                   34.3
                                                                                         28.6            28.2                                                                        28.6
                             30
                                                                                                                                                                      21.5
                                                         15.1
                             20

                             10

                              0
                                                  Republican


                                                                  Independent




                                                                                                  Hispanic



                                                                                                                 American




                                                                                                                                            Liberal
                                                                                                                               Union




                                                                                                                                                           Conservative
                                                                                     White




                                                                                                                                                                               Moderate
                                   Democrat




                                                                                                                  African




                                                                                                                                            Zogby International, 2002
                                                                                                                                                                                            31
                                  Which of these is the most important reason you
                                            support individual accounts?
                            45

                            40                                                    38.8
Percentage of respondents




                            35

                            30
                                                   25.7
                            25

                            20
                                    15.6
                                                                  14.4
                            15

                            10
                                                                                                       4.2
                             5

                             0
                                   Higher      People should Money could be I control money          Other
                                 retirement    be allowed to   passed on     in my account
                                  benefits    invest privately
                                                                                         Zogby International, 2002
                                                                                                                     32
                                 Which one of these is the most important reason you
                                            oppose individual accounts?
                            50
                                           47.3
                            45
                            40
Percentage of respondents




                            35
                            30
                            25                         23.3

                            20                                                        18.3

                            15
                            10
                                                                       5.6
                             5                                                                            2.1
                             0
                                     Private          Private    Administrative   Current system        Other
                                 investment is    accounts would costs too high       is fine
                                    too risky      drain money
                                                                                             Zogby International, 2002
                                                                                                                         33
      With which statement do you most agree?
      A: Allowing workers the right to invest a portion of their Social Security taxes would be too risky because
      individuals might lose money if the market performs poorly
      B: The current system is more risky because the government cannot pay all the benefits that it has
      promised.



                                      100

                                       90
             Percent of respondents




                                       80

                                       70

                                       60

                                       50            44.6                          43.7
                                       40

                                       30

                                       20

                                       10

                                       0
                                            Personal accounts more risky   Current system more risky
Zogby International, 2002
                                                                                                                    34
                              If Social Security taxes are invested in stocks, bonds and money
                                         market funds, who should do the investing?

                         70
                                                                                      62.0
                         60
Percent of respondents




                         50

                         40

                         30
                                            22.4
                         20

                         10

                          0
                              Government should invest through a   Individual workers should invest in private
                                        central fund                               accounts
                                                                                       Zogby International, 2002
                                                                                                                   35
With which statement do you most agree?
A: The Enron scandal shows the dangers of the stock market and why we must maintain Social Security as
it is and not allow individuals to invest their payroll taxes in personal retirement accounts
B: The Enron scandal proves that people need more choice and more control over their retirement savings,
including allowing workers the option to invest part of their Social Security taxes in a personal retirement
account




                                   70.0
                                                                          63.6
                                   60.0
       Percentage of respondents




                                   50.0


                                   40.0


                                   30.0   29.0

                                   20.0


                                   10.0


                                    0.0
                                          A                                 B
                                                                                     Zogby International, 2002
                                                                                                                 36
                                                              Base question

                                      One suggested Social Security reform would privatize the system
                                     by allowing younger workers the option to invest part of their Social
                                      Security taxes in individual accounts similar to IRAs and 401(k)s
                                            which they would own and control. Do you...this plan?

                                70

                                                                                               59.5
                                60
       Percent of respondents




                                50


                                40                36.1                                                       34.4
                                30
                                      23.4
                                                                        19.4
                                20
                                                             15

                                10                                                  6.1

                                0

                                     Strongly   Somewhat Somewhat     Strongly      NS      Total favor    Total
                                      favor       favor   oppose      oppose                              oppose

Zogby International, 2002                                                                                           37
  Does knowing this make you more or less
  likely to support the plan to privatize Social
  Security?*                                                         Support conditions
  Younger workers who invest a portion of
  their Social Security taxes in individual
  accounts will have to give up a portion of         4.0                        14.4
  their benefits under the current system.


  The Supreme Court has ruled that you
  have no rights to Social Security. In other                           1.7
                                                         3.6
  words, Congress is free to change or
  eliminate your benefits at any time.

  While plan will cost more in short run,
  it will restore long-run solvency, increase      1.0                                    23.0
  benefits for low-income widows and
  improve safety net for old age poverty.

  There will be no reduction in benefits for
  those who stay with the current system.          0.6                   8.6



                              10.0          5.0                0.0        5.0          10.0      15.0   20.0   25.0

                                         Percentage of those somewhat/strongly opposed to accounts in base
                                         question shifting to more favorable position.*
                                         Percentage of those somewhat/strongly in favor of accounts in base
                                         question shifting to less favorable position.*
Zogby International, 2002
                                                                                                                 38
                                                 Support Conditions

A candidate for congress says he wants
to give taxpayers ownership and
control over their retirement money.          4.0          9.7
Does this candidate’s position make you
more or less likely to vote for this candidate?

A candidate for Congress claims there is
no problem with Social Security. Does this 3.0                          35.6
candidates position make you more or less
likely to vote for this candidate?
A candidate for Congress acknowledges
problems with Social Security, but has
no plans to fix it. Does this candidate’s    3.3                          39.0
position make you more or less likely to vote
for this candidate?

                                         10            0         10        20         30         40        50

                                              Percentage of those somewhat/strongly opposed to accounts in base
                                              question shifting to more favorable position.*
                                              Percentage of those somewhat/strongly in favor of accounts in base
 Zogby International, 2002                    question shifting to less favorable position.*

                                                                                                            39

				
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