The right reform
By Paul Ryan
February 15, 2005
Today's Congress has the best opportunity in years to put Social Security on sound financial footing while giving workers access to a better rate of return on their investment. This can and will be done without changing benefits whatsoever for those 55 and older.
By giving younger workers the option of putting a significant part of their wages - say, 6% on average - into personal accounts they own and investing in a secure, government-approved retirement fund, we can eliminate long-term Social Security deficits.
In fact, personal accounts help reduce the need to cut future benefits or raise taxes to restore solvency to Social Security. And the larger the personal accounts, the less Washington will have to resort to such steps. This is because, over time, sizable accounts cover more of the program's benefit obligations, as future retirees draw on the savings and interest that have accumulated in their personal accounts for their retirement. (Contrast this with the current system, where retirees rely on current workers' payroll taxes.)
Evaluating legislation I introduced last year, the chief actuary of Social Security determined that large accounts would even erase Social Security's $10.4 trillion unfunded liability - what the program promises today's workers but cannot pay. To deal with the "transition costs" of diverting money into private accounts, we should make offsetting cuts in other government spending.
Not only are personal accounts crucial to sustaining Social Security for future generations, they also deliver a much better return on workers' investment. Currently, Social Security delivers a below-market return of 1.5% for beneficiaries. When my children retire, they will receive a negative rate of return. On the other hand, the Thrift Savings Plan - the retirement savings plan that serves federal employees and members of Congress - consistently delivers returns ranging between 4% and 11%, depending on the investment fund chosen. President Bush has mentioned this plan as a model for personal accounts.
In addition to better benefits, personal accounts offer workers the chance to amass savings in accounts they own and can pass on to their spouse, children or other heirs.
With large personal accounts as the lynchpin of reform, Congress can help future generations build a more prosperous and secure retirement through Social Security, maintain the program's safety net and ensure that seniors and those approaching retirement receive promised benefits.