Slowly but surely, Social Security reform is becoming one of the most talked about issues on Capitol Hill. Don't expect a major bill to pass next year; the legislation is not ready yet. But do expect many more than the 10 major proposals that surfaced last year to reappear, gain adherents and move the process forward. Every draft that appears helps clarify vital issues of how the transition would work and drives Congress toward likely enactment of full-scale reform by 2001. This September will be a particularly busy month for the introduction of new plans.
Consider a plan to be brought forward this month by Rep. John Porter, R-Ill. The new legislation goes beyond Mr. Porter's bill of last year. The plan would transform the current, unfunded, pay-as-you-go, tax-financed system. In its place would be a new, fully funded system based on private savings accounts, much like those used in the dozen or more countries that already have followed the lead of Chile's trailblazing system. Oh yes, the bill includes a tax cut. A practical case can be made for a new retirement system that performs better and costs less than our current model.
Far from being a third rail, Social Security reform actually has boosted the careers of its congressional champions. Rep. Mark Sanford, R-S.C., one of the earliest, loudest and most effective sponsors of another approach just as sweeping as Mr. Porter's, ran unopposed in the 1996 election. He, too, has a new, improved bill ready for formal introduction this month. Likewise, Rep. Nick Smith, R-Mich., has won praise from the newspapers in his Michigan district for the previous version of his Social Security Solvency Act. This bill would take the amount of surplus Social Security tax collected each year and allow taxpayers to save it in individual accounts.
Mr. Smith will introduce an updated version of the Social Security Solvency Act, and another innovative plan that would create a pilot program allowing up to 500,000 young people between the ages of 20 and 30 to voluntarily opt out of the Social Security system on a partial basis and earmark some of their payroll taxes to participate in whatever savings-based Social Security reform plan they find most appealing. This demonstration program, as Mr. Smith calls it, would gauge the level of popular support for the various approaches to reform and provide the practical experience necessary for administering larger-scale changes. He hopes to have a technical study done in 1998 and the program itself under way by 1999.
Another indication of rising interest in Social Security reform is the stunning growth in the Congressional Public Pension Reform Caucus, which in the last year has almost doubled in size to some 80 members. What is more, the breakdown of caucus membership by party affiliation almost exactly reflects the overall makeup of Congress. Since the success of his National Bipartisan Commission on Entitlement Reform, Sen. Robert Kerrey, D-Neb., has been a leading advocate of allowing taxpayers to save some portion of their payroll taxes in a private retirement account. Many have seen this proposal as part of a plan by Mr. Kerrey to position himself for winning the Democratic presidential nomination. Recent polling conducted by the Democratic Leadership Council suggests Mr. Kerrey's instincts are right. In the poll, 73% of Democratic voters would favor such a plan.
In another blockbuster proposal, Sen. John Ashcroft, R-Mo., champions the American Wage Restoration Act, which would allow an income tax deduction for money already paid in Social Security taxes, thus ending regressive double taxation on this income stream.
Two reasons for public interest in Social Security reform come from mechanisms shared by most of the leading reform proposals. First, they cut taxes, because fewer tax dollars are needed to support a privatized system. Second, they include a voluntary or "opt out" provision that saves the current system for those who wish to stay in it. Many older Americans will understandably choose to stay with what they know. Most younger Americans will calculate where their interest lies and go with the newer model. In England, 73% of taxpayers have opted into the private pension system.
The whole idea of calculating what works best is a revolutionary concept in itself. The growth of America's information society has meant more and more Americans are familiar with the official government projections showing the current Social Security system is only about 70% funded. But just as significant is the growing sophistication of the American public about rates of return and the enormous range of savings and investment vehicles that is available to them through the financial services industry.
Witness the huge popularity of mutual funds as vehicles for middle-class savings, the explosive growth in the use of 401(k) plans for retirement benefits, and the shift from defined benefit to defined contribution retirement plans generally.
The basic concepts behind a privatized Social Security system are now routine business for the great majority of Americans.
Social Security is a very bad deal for most younger Americans. Single male taxpayers under age 52 and virtually all younger workers of either sex will get less from Social Security than they pay into it. How do people know this? They run the numbers for themselves. Financial calculators have proliferated on the Internet and in personal computer programs. One example is the Americans for Tax Reform's Social Security calculator at its Web site (www.WhenIm64.com) to see how much they pay for Social Security, what they can expect to receive at retirement and what they could have had if they invested that money on their own. The ATR calculator confirms academic studies showing that on conservative investment assumptions, most Americans would enjoy at least three to six times the standard of living in retirement from a private system than they would receive from Social Security.
The ATR calculator and a similar program sponsored by the Cato Institute (at www.SocialSecurity.org) already have begun to have an impact on public policy. In May of this year, the Oregon Legislature passed a resolution calling on Congress to allow the Pacific Northwest state to create an alternative to Social Security for its residents. Model legislation has been prepared for similar resolutions in all 49 other states next year. Meanwhile, the states of Georgia, Colorado and Delaware have adopted resolutions essentially calling for Social Security privatization.
Perhaps the most ambitious state-level change under way is the transformation of public employees' pension plans from defined benefit to defined contribution structures. Michigan has just adopted a plan that puts all new employees in a defined contribution plan and allows all employees to opt into this plan if they wish. Basic calculations show a 35-year-old worker with 10 years of contributions, who might expect $4,500 from the defined benefit plan, could receive $16,435 (assuming an 8% rate of return), or nearly four times as much, in annual income from investments under the defined contribution plan. California also has just approved a similar system for employees of its state university system. The model legislation appropriate for all 50 states recently won a unanimous endorsement from a key policy board of the American Legislative Exchange Council, a leading association of state legislators. Under the aegis of "pension portability" and "pension liberation," ATR is now gearing up a major campaign to work with state legislators to introduce and pass such legislation in as many as 15 states next year.
As the public sector follows private sector employers in making the shift from defined benefit to defined contribution plans, many of the same arguments that would apply to privatizing Social Security will arise, but in a much more limited context that serves to educate the public about the benefits of defined contribution plans in general. In many ways, each state that shifts to a defined contribution plan for new workers with an opt-in provision for workers in the previous system provides a miniature dress rehearsal for wholesale privatization on the national level. In addition to this, governors who have built their careers on moving states from outmoded pension schemes to popular modern ones in a win-win proposition for all concerned will emerge as natural spokespeople for a new, expanded and improved Social Security system when they reach higher office.
To this mix we add another factor. There is a growing consensus in Washington that individual retirement accounts should be greatly expanded, that restrictions on the use of IRA funds should be eliminated as IRA deductions are allowed for more purposes, and that ultimately, all savings should be given IRA treatment as a prelude to fundamental tax reform - because every tax reform proposal under consideration would do this anyway. Moving to a single-rate tax, such as the flat tax, will in itself move us a long way toward Social Security privatization. At that point, the only element missing for a fully privatized retirement system would be mandatory contributions and appropriate guidelines for management of these funds by the financial services industry, plus a method for compensating those who already have paid taxes into the existing system.