Forbes Encourages Administration to Stand on Personal Accounts

October 9, 2003

In the latest edition of Forbes Magazine, Steve Forbes praises Cato's Social Security efforts and implores the Bush administration to be bold on Social Security reform. Claiming there is nothing to lose and everything to gain from a bold personal account-proposal, Forbes lays out specific requirements of a solid plan. Excerpts of Forbes' column, "Making Social Security a Money Machine," follow:

"'Saving social security' will be a sizzling campaign issue next year. Instead of trying to preserve FDR's brainchild, why not transform it into something that enriches the economy and significantly expands retirement benefits?

"Since Republicans are going to get hammered for even considering changing the current on-its-way-to-going-broke system, they might as well be bold instead of tentative. They should advocate an exciting, whole-hog alternative to today's system, thereby making the reform effort worth the political heat.

"The problems with Social Security are now largely known—the declining number of workers versus retirees, the fiscal irresponsibility of pay-as-you-go (it's the public-sector equivalent of a private pension system with no reserves, which, of course, is illegal). Experts argue about when exactly the system will begin to pay out more than it takes in. But no one's arguing that Social Security won't eventually self-destruct, unless it's infused with funds from massive tax increases or, equally unpleasant, scaled down by reductions in benefits.

"The White House and the GOP should emphasize that Americans could choose to stay with the old plan or go with the new. But instead of permitting workers to put only 2-to-4 percent of their payroll tax into personal accounts, as the Administration proposed in 2001, why not increase that to 8 percent or more? Make the contribution significant from the start.

"Whatever the particulars of the new system are, it should have these basic components:

• Guaranteed minimum monthly payments adjusted for inflation, regardless of how your account performs. This would remove a lot of what-if-the-financial-world- collapses-just-as-I-retire angst.
• A small portion of the payroll tax should go toward disability and life insurance, which would provide more generous benefits than similar components do in the current Social Security scheme.
• People should be able to choose from an array of investments (including those with no participation in the stock market): diversified mutual funds that meet certain conservative financial criteria, including low expenses; fixed-rate insurance contracts; U.S. government bonds; government-insured bank CDs; and the like. Government workers in Galveston, Tex., for example, opted out of Social Security two decades ago, and their money went into fixed-income instruments only.
• Benefits should be exempt from income tax.
• Married couples' contributions should be split from the get-go, i.e., half of the husband's contribution should go into the wife's account and, if she also works, vice versa. That way, if there is a divorce, there'll be no fighting over those private accounts.

"The reason all money would initially go into money market accounts is a largely unknown peculiarity in the way the feds now keep Social Security records: Employers send in Social Security taxes in lump sums periodically throughout the year. Incredibly, only in the following year are those lump sums allocated to specific individuals' accounts.

"Bill Shipman, chairman of CarriageOaks Partners and cochairman of the Cato Project on Social Security Choice … has done extensive work demonstrating that such a system can be created with extremely low administrative costs. At the first level, workers' money would be invested in a collective money market fund similar to the ones the mutual funds industry offers today. Then the participants would have four choices— among three balanced funds and a money market account. The balanced funds would be diversified portfolios that combine stocks, bonds and cash. One such fund that might appeal to younger workers would be geared toward equities; another, appealing to those closer to retirement, would be geared toward bonds.

"There is nothing to be gained—and fantastic opportunities to be lost—by the Administration's being timid."

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