Daily Debunker

March 1, 2005

According to the Washington Post, Republicans in Congress are desperate to negotiate a deal on Social Security reform. But in their willingness to bargain with Democrats, Congressional Republicans had better be careful they don't back themselves into a bad deal.

One example mentioned explicitly in the Post is Rep. Clay Shaw's bill to create add on accounts on top of the traditional system:

"In one example, Rep. E. Clay Shaw Jr. (R-Fla.) said, a compromise might involve merging Bush's proposal with plans -- some backed by Democrats -- that create government-subsidized savings plans outside Social Security. Under this scenario, Bush's proposal to divert 4 percent of an individual's Social Security payroll tax would become 2 percent or less.

"'The president could claim a real victory just by getting personal accounts,' said Shaw, who has shared his ideas with Vice President Cheney and White House senior adviser Karl Rove. 'It may be that a hybrid is the key to compromise.'"

Rep. Shaw already has a bill in Congress to create add on accounts. But additions to the current system are really just a tax increase. Simply put, the Shaw bill would require Americans to pay a higher rate than 12.4% of their income into Social Security. One of the two caveats President Bush laid out at his State of the Union Address was no payroll tax increase.

But what if the add on accounts were voluntary? The only people who could afford to participate in such a program would be the very people who already take advantage of market growth through their personal investment portfolios, specifically the wealthy and high-income earners.

The Cato Institute has spoken out against add on accounts before. Here is a commentary from as far back as 1999:

"Low-wage workers have little discretionary income with which to fund such accounts. Therefore, they are unlikely to participate in such a program, even if incentives such as tax breaks or matching funds are included. For example, studies show that less than 39 percent of workers with income under $15,000 participate in their company's 401(k) program. Therefore, unlike proposals to privatize Social Security, voluntary add ons will do little to increase the opportunity for poor Americans to accumulate real wealth and savings. They are little more than another middle class tax shelter."

Add on accounts are no better an idea today than they were then.

Worse, add on accounts would do nothing to help solve the financial crisis facing Social Security. Darcy Ann Olsen wrote a briefing paper for the Cato Institute on the subject, which debunks the putative benefits of add on accounts.

The willingness to negotiate is integral to success in the fight to reform Social Security. But some ideas – like add on accounts -- do not merit a seat at the table.