Ferrara Touts Reform Plan

December 10, 2003

According to a memorandum from the Social Security Administration, Peter Ferrara's reform plan, if enacted, would bring the system to solvency and meet Social Security's benefits obligations. Writing in the Wall Street Journal, Ferrara made the case for his plan:

"George W. Bush put the idea of a personal account option for Social Security on the national agenda … Such reform would allow workers the freedom to choose to shift a portion of their Social Security payroll taxes into their own personal investment account, which would then finance a proportionate share of future Social Security retirement benefits.

"But up until now, establishment Washington has assumed that at most an option for only two percentage points of the 12.4 percent Social Security payroll tax would be feasible. The Social Security Administration (SSA), however, [released] an official score for a proposal for much larger personal accounts, averaging 6.4 percentage points. That score shows that such large personal accounts would achieve permanent solvency for Social Security, without benefit cuts or tax increases. Moreover, it shows that the transition financing burdens of such reform would be quite manageable.

"The proposal … would allow workers to shift five percentage points of the payroll tax into their own personal account, but on the first $10,000 of income that would be doubled to 10 percentage points. This makes the proposal quite progressive, with lower income workers able to devote a higher percentage of their Social Security taxes to the account.

"At standard, long-term, market-investment returns, these accounts would be large enough to pay workers substantially more than Social Security promises, but cannot pay. Indeed, the progressivity of the proposal mirrors the progressivity of Social Security, with workers at all income levels gaining about the same percentage over what Social Security promises, about two-thirds more.

"These investments would be made through a social structure where workers would choose from a broad range of investment funds managed by major firms, approved and regulated by the government.

"The SSA score, produced by Chief Actuary Stephen Goss and his staff, assumed the reform begins in 2005. With workers likely choosing the personal accounts overwhelmingly, over time the accounts would take over more and more of the benefit obligations of Social Security. By 2055, almost all of the program's retirement benefits would be paid through the personal accounts, permanently eliminating all of the deficits of the current program just through the accounts alone.

"The score also shows that the transition deficit before that point, created by workers shifting so much of their payroll taxes to the accounts, would be covered entirely by four factors. One is the short-term Social Security surpluses through 2017. Second is the funds obtained by reducing the rate of growth of total federal spending by 1 percent per year for each of just eight years, through 2012. Third is the increased revenues that would result from increased savings and investment through the accounts.

The final factor would be to sell excess Social Security trust fund bonds to cover any remaining trust fund deficit in the early years … The Social Security trust funds would never fall below $1.38 trillion, enough to finance 145 percent of one year's benefits. The SSA's standard for solvency is 100 percent. With these transition financing sources, Social Security goes into permanent, growing surplus in 2029, with the trust funds eventually accumulating to an excessive $6.3 trillion. Within the following 15 years, the surpluses would be sufficient to pay off the trust fund bonds sold in previous years.

"This solvency is achieved with no benefit cuts and no tax increases. Because of the much higher returns on real capital investment than on purely redistributive, pay-as- you-go Social Security, the personal accounts would also produce much higher benefits for future retirees than Social Security promises, let alone what it can pay.

"Such reform would also eliminate the unfunded liabilities of Social Security, currently about $10.5 trillion, roughly three times as large as the currently reported national debt. The reform would consequently also produce the largest reduction in government debt in world history. These results are achieved even though SSA's official score does not count the likely quite large effects of the reform in increasing economic growth, through increased savings and investment, and reduced taxes. That increased growth would produce more revenues for the transition, which would sharply reduce the need for selling any Social Security trust fund bonds.

"All these tremendous benefits of the reform result because it involves shifting from the enormous, purely redistributive, pay-as-you-go program of today to an enormous real savings and investment program that sharply increases national wealth, income and economic growth ... Such reform not only solves the problems of Social Security, but provides the capital for the technology intensive 21st century economy to leap to a new level."

Mr. Ferrara, director of the International Center for Law and Economics, is a senior policy adviser on Social Security to the Club for Growth. For more information on Ferrara's proposal published by the Institute for Policy Innovation, see "A Progressive Proposal for Social Security Private Accounts."

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