Reforming Social Security

As the debate over Social Security begins to heat up, it’s a good idea to agree on a few fundamentals. First, there is the demographic issue of increasing retirements of the baby boomer generation. Somewhere between 2018 and 2020, Social Security will be paying out more than it takes in.

Will the Social Security system come to a screeching halt in the next decade? No, it will not.

It is more accurate to describe the situation as a bomb with a very long fuse, one that has already been lit.

Equally worthy of concern is that a few decades after the Social Security system begins to pay out more than it collects, the system will no longer be able to pay the benefits that have been promised. For each year we wait, it will cost an additional $600 billion, which will continue to rise. The longer we wait to take action, the more difficult and expensive the changes will be. The option of doing nothing now, means cutting benefits and massive tax increases later.

Is that the vision for safety net that opponents of reform have in mind – a cut in benefits and higher taxes?

President Bush has stepped up to the plate and put forward his principles for Social Security reform. They are as follows:

1. No changes in benefits for those 55 and older.

2. No payroll tax increases.

3. Voluntary personal retirement accounts to give young workers a choice of retirement and creating a bigger retirement nest egg.

The president’s first principle, protecting seniors today, is exactly the right thing to do. Seniors currently receiving Social Security should get every penny they were promised, and the same should be true for those folks approaching retirement age.

On the issue of payroll tax increases, again, I agree with President Bush; No payroll tax increases. A little history is important here. In 1950 the maximum tax for one worker was $90 per year, and in 1965 that number was $348 dollars per worker. In 2004, the maximum tax for one worker has exploded to more than $11,000 or 12.4 percent of wages (capped at $90,000). It gets worse. In order to support the baby boom generation in the coming decades, the Social Security Board of Trustees estimates that the system will need a 50 percent increase in the payroll tax to meet future benefit obligations.

That’s why the president’s plan for voluntary personal retirement accounts is so important. While it would appear that much is being said in an attempt to undermine personal accounts, it is based on erroneous information. Here is what the president is actually proposing.

. Personal retirement accounts would be voluntary. Those who do not opt for a personal retirement account would continue to draw benefits from the traditional Social Security system, reformed to be permanently sustainable. The system of personal retirement accounts would be similar to the Federal employee retirement program, known as the Thrift Savings Plan (TSP). Contributions would be collected and records maintained by a central administrator.

. Personal retirement accounts would start gradually. Yearly contribution limits would be raised over time, eventually permitting all workers to set aside 4 percentage points of their payroll taxes in their accounts.

. Personal retirement accounts would be invested in a mix of conservative bond and stock funds. Workers would be permitted to allocate their personal retirement account contributions among a small number of very broadly diversified index funds patterned after the current TSP funds.

. Personal retirement accounts would be protected from sudden market swings on the eve of retirement. To protect workers as they near retirement, personal retirement accounts would be automatically invested in the “life cycle portfolio” when a worker reaches age 47, unless the worker and his or her spouse specifically opted out by signing a waiver form stating they are aware of the risks involved.

. Personal retirement accounts would not be eaten up by hidden Wall Street fees. Personal retirement accounts would be low-cost. Most of the administrative fees, estimated at 30 basis points, would be for record keeping, which would be done by the government, not investment management done by Wall Street.

It would have been far easier for the president sit back and let the next administration take on Social Security reform. He deserves credit for tackling the issue now and he deserves the support of Congress in working together to find solutions so that the Social Security system will be there for our children and our grandchildren.

Brian N. Hamel lives in Presque Isle and was the 2004 Republican nominee for Congress in Maine’s 2nd District.