Personal Retirement Accounts Trump Social Security Fund

January 23, 2003

Bob Costello, president of Social Security Choice.org, writes for The Chicago Sun Times that reform must not be postponed, citing the successes of personal account in other nations that have enacted pension reforms. The op-ed text follows:

With the elections over, it is time for demagoguery on Social Security to end as well. We need to move from a pay-as-you-go model to a fully funded system based on personal retirement accounts.

Simply put, without reform Social Security is a demographic time bomb. Its "pay-as- you-go" financing worked when there were 15 workers for each retiree, as in the 1950s. But increased life spans and lower birth rates mean more retirees to support and fewer new workers to support them. Today, there are only 3.4 workers per retiree, and Social Security taxes have had to be raised many times already to pay promised benefits. By 2035, there will be only two workers per retiree, and taxes would need to rise from the current 12.4 percent rate to 18 percent or more to pay the benefits the current program has promised. There must be a better way.

The idea behind personal accounts is simple: Younger workers would have the option to invest part of their Social Security taxes in an account holding diversified, low-cost mutual funds of stocks and bonds, which would build value over time. At retirement, workers could draw on their account assets to help pay their monthly Social Security benefits.

Why is saving in personal accounts better than Social Security's "trust fund"? For one, it's real saving. Unlike the trust fund, which is endlessly "raided" to pay for other government programs, personal accounts would be the legal property of the worker. The government could not touch it, and workers who died before using up their account--primarily low-wage workers or minorities--could pass it on to their spouse, children or a chosen charity. Compared with the current system, personal accounts give greater choice, security, ownership and control.

Retirees and those nearing retirement would not be affected. Their benefits would be paid in full, without any changes whatsoever. The only change for them would be knowing that their children and grandchildren wouldn't have to worry about whether Social Security would exist when they retired.

America is not alone in facing this demographic crisis. Other countries have already reformed their pension programs, and the most successful have used personal accounts. It began in Chile in 1981, when the country's bankrupt pay-as-you-go program was transformed into a system of individually owned retirement accounts. The rest of Latin America followed Chile's lead, and most countries now have account-based systems.

Since 1986, Britain has allowed workers to opt out of the second tier of its public pension system. Britain's private pension assets are now worth more than $1.4 trillion in U.S. dollars--more than the rest of Europe combined. Australia reformed its pension system with personal accounts 10 years ago, and a recent study rated Australia as the developed country best prepared for future population aging.

Personal accounts are sweeping the globe. Even socialist Sweden now allows workers to put 2.5 percent of their payroll taxes into individual accounts.

No one is trying to destroy the Social Security system. No party and no candidates are pushing for a cut in benefits. This should not be a partisan issue. The goal that everyone should be aiming for is to make sure that we can continue paying the benefits.

Social Security reform is not about putting payroll tax money into the stock market. It is about making sure we have a sound retirement system that is there for current retirees and future generations.

2005 Index | 2004 Index
2003 Index | 2002 Index | 2001 Index
2000 Index | 1999 Index | 1998 Index