Listen to This, Mr. Archer

October 15, 1999

by Michael Tanner

Listening is in vogue these days in Washington. Among the latest to announce a series of "listening sessions" is House Ways and Means Committee chairman Bill Archer (R-Tex.), who plans a series of meetings with his Republican colleagues to discuss his proposal for revamping the Social Security system. Unfortunately, so far Representative Archer has demonstrated a surprising tin ear on this issue. Along with Rep. Clay Shaw (R-Fla.), Archer has put forward a stunningly misguided plan that is both bad policy and bad politics, in many aspects worse than the proposals advanced by the Clinton administration.

But there is still time for the chairman's colleagues to give him a badly needed wake-up call. With a little luck, here are just a few things that Representative Archer should be told:

Archer-Shaw is a hidden tax increase. The chairman's plan would pump nearly $2.6 trillion more in general revenue than called for under current law into the Social Security system by 2034. That is roughly the same amount of new tax revenue as would be collected through a 2 percent increase in the payroll tax. Shifting the form of taxation from payroll taxes to income taxes does not mean that 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.

The individual accounts under Archer-Shaw are phony. Advocates of individual accounts should not be fooled by their inclusion in the chairman's proposal. Under Archer-Shaw individuals would have no true ownership of those accounts since, at retirement, the individuals would be required to surrender them to the government in exchange for an annuity. After retirement, there would be no inheritability of the accounts. In effect, workers would 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.

Archer-Shaw does nothing to increase the rate of return that young workers will receive from Social Security. Social Security's problems go far beyond its financial troubles. For example, under current law, future workers can expect to receive a rate of return on their payroll taxes of one percent or less. Many younger workers will actually receive a negative rate of return, less back in benefits than they pay in payroll taxes. Under Archer-Shaw, the maximum amount that workers 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.

A recent Zogby International poll, commissioned by the Cato Institute, found that by a margin of 55 to 31 percent, American voters supported transforming Social Security into a system of individual accounts. Support for Social Security privatization cut across party and ideological lines. Privatization was supported by majorities of men, women, blacks, whites, Hispanics and union members. Perhaps even more relevant to members of Congress, voters said by roughly 2 to 1 that they would be more likely to vote for a candidate who supported privatization.

Chairman Archer's colleagues should ask him why he wants to throw that political advantage away in pursuit of a Social Security reform plan that is not really reform.

Michael Tanner is director of health and welfare studies at the Cato Institute.

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