Social Security Reform Cooking Again
Monday, February 15, 2010
Historic change sometimes comes from unlikely sources.
A famous example was long time anti-Communist Richard Nixon breaking the diplomatic ice with Red China.
One that came close was in 1998 when President Clinton carefully studied reforming Social Security with personal retirement accounts along the lines that President George W. Bush proposed a few years later.
Clinton's research team, which included Douglas Elmendorf, current director of the Congressional Budget Office, spent a year and a half studying options for revamping Social Security, and intense scrutiny was given to the personal accounts option.
In December of 1998, the Clinton White House hosted a Social Security Summit, and one of the invited speakers was Jose Pinera, the Chilean who in 1980 transformed, with great success, his nation's Social Security system to one of ownership with personal retirement accounts.
As reported by Elmendorf and two colleagues in a paper in 2001, sweeping Social Security reform proposals were politically derailed by Clinton's impeachment.
Nevertheless, Clinton told the nation in his State of the Union address in January 1999 that Social Security was broken and needed reform: "Today, Social Security is strong. But by 2013, payroll taxes will no longer be sufficient to cover monthly payments."
Clinton was optimistic. It is now 2010 and payroll taxes will not cover payments.
Fortune Magazine's Allan Sloan reported last week in the Washington Post that, although no government official has formally announced as such, a Congressional Budget Office report shows that "Social Security will be $28 billion in the hole this fiscal year, which ends Sept. 30."
A few visionary and courageous young members of Congress, such as Paul Ryan, R, Wisc., are trying to get bold reform of Social Security back on the table.
Ryan calls his broad-based reform bill, which has nine co-sponsors, a "Road Map for America's Future." It includes a provision to allow those under 55 the option of taking ownership of a third of their current Social Security taxes and investing them in a personal retirement account.
Surely initiatives to revive the personal retirement account idea will run into the same opposition and criticism that President Bush encountered. A major one, that it would expose the average American to excessive risk, will be trumpeted even more now in the wake of the recent major stock market downturn.
But this criticism is incorrect now as it was then.
The positive compounded annual returns of investing over a 45-year working life will overwhelm the inevitable years of downturn.
The awakening that needs to occur is to appreciate that the breakdown of Social Security, as well as Medicare, reflects the inevitable failure of social engineering. It seemed like such a bright idea 75 years ago, when there were more than 40 individuals working for every retiree, to provide a government retirement stipend financed with a payroll tax. But it doesn't work quite as well when there are three, on the way to two, working and paying for each retiree -- today's reality.
Tax increases and benefit cuts, with the goal to make the existing Social Security system solvent, would only make a bad deal even worse for every working American.
We need, in the words of Abraham Lincoln, a "new birth of freedom." Restore an American retirement system based ownership rather than socialism.
This is a bi-partisan reform opportunity where Barack Obama can truly make history.
Wealth doesn't come from income. It comes from ownership. Investing in personal retirement accounts, rather than paying Social Security taxes, would be a boon for America's black community. Median financial wealth of black households, excluding home ownership, is about a hundredth that of white households.
Maybe there will be an epiphany in the White House and historic change will again come from an unlikely source.