Social Security Listening Sessions: What Needs to Be Heard

September 17, 1999

This week, Ways and Means chairman Bill Archer and Social Security Subcommittee chairman Clay Shaw are holding a series of closed-door "listening sessions" with House members on their legislative proposal for Social Security. The director of the Cato Project on Social Security Privatization, Michael Tanner, has sent a letter to the members, reminding them of the bill's shortcomings.

Briefly, Tanner says that the Archer-Shaw approach would:

• spend about $2.6 trillion more than is being spent under current law through 2034;
• reduce the already paltry rate of return Social Security recipients get on their contributions;
• deny recipients true ownership of their accounts, since they would be required to give the accounts to the government in order to get an annuity;
• do nothing to broaden wealth creation and ownership in America; and
• may actually increase the unfairness of the current system.

A copy of the letter follows:

September 15, 1999

As Chairman Archer and Social Security Subcommittee Chairman Shaw convene closed-door "listening sessions" on Social Security, I thought it would be useful to restate what I believe must be discussed before any Social Security reform is seriously considered.

No tax increase. Social Security reform should not increase the amount that American workers pay into the system. This means more than just no increase in payroll tax rates. General revenues, which are simply individual and corporate income taxes, should not be used to prop up an unreformed system. To use general revenues in this way is effectively the same as a tax hike. As currently written, the Archer-Shaw proposal spends approximately $2.6 trillion more than current law through 2034. Spelled out, that means that current law would cost approximately $7.5 trillion while Archer-Shaw would cost taxpayers $10.1 trillion in general revenues. That is roughly the same amount of new tax revenue as would be collected through a 2 percent increase in the payroll tax. Don't be fooled by the pro-tax increase rhetoric- shifting the form of taxation from payroll taxes to income taxes does not mean it is not a tax increase. Moreover, this new revenue must be paid regardless of whether projected budget surpluses materialize. A new entitlement would be created, meaning that in the event of an economic slowdown that decreases projected surpluses, taxes would have to be explicitly hiked.

Increased Rate of Return. Any Social Security reform should increase the rate of return that young workers will receive. Under current law, future workers can expect to receive a rate of return of one percent or less on their payroll taxes. Many younger workers will actually receive a negative rate of return, less back in benefits than they pay in payroll taxes. As currently written, the Archer-Shaw proposal does not increase the rate of return. Under Archer-Shaw, the maximum amount that any individual could contribute to their individual account would be $1,452 per year. An average wage worker would contribute less than $600. Compounding the problem, Archer-Shaw then requires that 40 percent of the funds in the individual account be invested in low-yielding bonds. As a result, almost no one would receive higher benefits or a higher rate of return than they do under the current program. Indeed, given the use of income tax revenues, the rate of return would actually be lower under the Archer-Shaw proposal.

Genuine ownership. Under the current Social Security system, Americans have no legal right to their Social Security benefits (Nestor v. Fleming, 1960). Any Social Security reform that creates individual accounts should give workers true ownership of those accounts and a legal right to the benefits from those accounts. However, under Archer-Shaw, individuals would not have true ownership of their accounts since, at retirement, they will be required to surrender them to the government in exchange for an annuity. After retirement, there would be no inheritability. In effect, workers will merely "rent" their accounts rather than own them. Individuals would still have no legal right to their retirement benefits, leaving their retirement security in the hands of politicians.

Wealth creation. One goal of Social Security reform should be wealth creation, giving low-income Americans the same opportunities to save, invest, and accumulate wealth as the wealthy now enjoy. However, because of the lack of ownership and inheritability discussed above, Archer-Shaw would do nothing to broaden wealth creation and ownership in our society.

Fairness. Any Social Security reform should fix the inequities within the current Social Security system, those features of the current program that penalize working women, the poor, and groups with shorter life expectancies, such as African-Americans. The Archer-Shaw plan does nothing to address these problems and may, in fact, increase the unfairness of the system.

As you ponder the future of the largest government entitlement program -- a program that currently consumes more than 12 percent of every dollar most workers will earn during their entire working life -- be prepared to ask hard questions. Make sure your constituents aren't going to have to pay higher taxes, accept lower rates of return, or sacrifice ownership and liberty, in order to continue paying into a broken Social Security system that is fundamentally unfair.

Sincerely,

Michael Tanner

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