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Time is Right for Social Security Reform

4 min readBy: J. D. Foster, Ph.D.

As if with the flip of a switch the third rail of American politics has become the high-speed rail to the White House. For years politicians have feared to mention Social Security reform, so when George W. Bush unveiled the essentials of his Social Security reform plan on May 15, he showed the country is ready to get serious about “saving” the government’s biggest program.

The problems are simple enough. Social Security pays today’s workers a ridiculously low rate of return and it will soon run enormous annual deficits.

The Bush plan is equally simple in outline. Current and soon-to-be retirees will be unaffected. Payroll taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. es will not be increased to fund the shortfall and creative accounting will not be used to cover it up. Instead, workers will be allowed to invest a portion of their Social Security taxes on their own, subject to guidelines preventing imprudent decisions. They will be allowed to keep the money when they retire and leave any remaining assets in their estates. By earning market rates of return on their private accounts, workers will raise the rate of return on their payroll taxA payroll tax is a tax paid on the wages and salaries of employees to finance social insurance programs like Social Security, Medicare, and unemployment insurance. Payroll taxes are social insurance taxes that comprise 24.8 percent of combined federal, state, and local government revenue, the second largest source of that combined tax revenue. es.

The extra return workers will earn in their private accounts will also help relieve the pressure when Social Security outlays far exceed receipts beginning in about 15 years and continuing indefinitely. Social Security has two enormous problems and private accounts address both problems.

Governor Bush’s Social Security reform plan recognizes a sea change in the political culture surrounding this enormous federal program. A recent poll by Zogby International shows the true breadth and depth of the change. Nearly two months prior to the release of the Bush plan Zogby asked 1068 Americans, “How likely would you be to support Social Security privatization if it allowed you to take your Social Security money and invest it in a retirement account of your choosing.” Nearly 70 percent said they would be “totally likely” to support such a plan.

Such strong support is surprising, but the demographic breakdowns are even more so. For example, 89 percent of Hispanic and 75 percent of African American respondents indicated strong support. Whites actually lagged at 65 percent.

Another surprise is that 72 percent of self-described progressive or very liberal respondents supported the approach, significantly more than the 65 percent of self-described conservatives. Another surprise, perhaps particularly to the national union leadership, is that two-thirds of union members would strongly support moving to private accounts.

Not surprising is that 96 percent of respondents below the age of 29 and 80 percent of those between the ages of 30 and 49 strongly support Social Security reform. They already know they will either see their promised Social Security benefits slashed or see their children’s payroll taxes raised through the roof if privatization is not enacted quickly.

Governor Bush recognized the sea change in attitudes toward Social Security, but he did not create it. The change probably began many years ago when the predominant private system was a defined benefit pension. Under a defined benefit plan, employers guaranteed a specific retirement benefit. The regulatory burden associated with these plans became so great that businesses shifted en masse to the less regulated and far more flexible defined contribution plan. Under a defined contribution plan, employees decide, within limits, how much of their wages to put into the plan and often have a number of investment options.

As more and more employees came under defined contribution plans, they saw the consequences of their own investment decisions in the form of steadily growing pension assets. Millions of citizens who would never have considered investing in the stock market or in mutual funds on their own found themselves taking responsibility for their own financial futures to a far greater degree. And they found they liked it. Freedom is like that.

The internet also has played a role in this cultural transformation, making it far less expensive for individuals to buy and sell equities. More importantly, the internet has made it much easier for individuals to become knowledgeable about the mutual funds and other investment vehicles they are considering. Armed with greater knowledge acquired at their own pace and in their own time, many more individuals now own stocks on their own account. Twenty years ago only 5.7 percent of households owned mutual funds. Today, 44 percent of households own mutual funds and almost 50 percent hold stocks. In short, Wall Street has been replaced by the internet highway and average citizens travel these byways regularly and without fear.

Americans are by nature an independent lot. For a relatively brief period beginning with the enactment of FDR’s great social programs such as Social Security, a generation of Americans stunned by the Great Depression forsook their traditions and gratefully turned to the government for their economic protection. Succeeding generations, enraptured by the economic promises of socialization, built on this new trend.

The times, however, are a’changing. Americans seem to be returning to their natural individualism. Not that government is without its role as safety net provider, but Americans increasingly seem to prefer self-determination to the beneficent overlord. When progressives, liberals, union members, African Americans, women, and even Democrats all by a two-to-one margin or better prefer to manage their own retirement assets rather than have the government do it for them, then clearly Governor Bush has by instinct or by luck clearly placed himself on the right side of history in the making.