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The Wall Street Journal Editorial - Outside the (Lock) Box

Location: Washington, DC

Outside the (Lock) Box

July 19, 2004; Page A10

WASHINGTON-Despite the media's oddly cheery take on recent Congressional Budget Office projections for the exhaustion of the Social Security trust fund, this critical program remains mired in unsustainable long-term deficits, with benefits that are well below historic market returns. Without significant improvements to Social Security, our government will be left to choose between several painful options: endlessly borrowing more money, cutting benefits, raising taxes or a combination of these.

Fortunately, there is an alternative. This week I am introducing new legislation that empowers workers with the freedom to choose a large personal account option for Social Security, with no benefit cuts or tax increases of any sort, now or in the future. Through these large personal accounts, the bill would increase future retirement benefits and cut future taxes for all workers. This bill has already been scored by the chief actuary of Social Security as achieving full and permanent solvency for the program.

The bill would allow workers to shift to their personal accounts 10 percentage points of the current 12.4% Social Security payroll tax on the first $10,000 of wages each year, and five percentage points on all taxable wages above that. With this progressive account structure, on average, workers would be shifting 6.4 percentage points of the 12.4% tax to their accounts.

Workers choose investments by picking funds managed by major private investment firms, from a list officially approved for this purpose and regulated for safety and soundness, similar to how the Thrift Savings Plan for federal employees operates.
Benefits payable from the tax-free accounts would substitute for a portion of Social Security benefits based on the degree to which workers exercised the account option over their careers. Workers exercising the personal accounts would receive traditional Social Security benefits based on the past taxes they have already paid into the program, in addition to the money from their personal accounts.

The plan maintains a strong safety net, as the accounts are backed by a federal guarantee that workers would receive at least as much as Social Security promises under current law. The plan is voluntary. Anyone who chooses to stay in traditional Social Security would receive the benefits promised under current law. Survivors and disability benefits would continue as under the current system.

The proposal achieves solvency without benefit cuts or tax increases because so much of Social Security's benefit obligations are ultimately shifted to the accounts. In fact, the official score of the chief actuary shows that ultimately, instead of increasing the payroll tax to over 20%, as would be needed to pay promised benefits under the current system, the tax would be reduced to 4.2%, enough to pay for all of the continuing disability and survivors benefits. This would be the largest tax cut in U.S. history.

Moreover, at standard, long-term, market-investment returns, the accounts would produce substantially more in benefits for working people across the board than Social Security now promises, let alone what it can pay. A study last year published by the Institute for Policy Innovation showed that with personal accounts of this size, an account invested half in corporate bonds and half in stocks, and earning standard long-term market investment returns, would provide workers with roughly two-thirds more in benefits than Social Security promises, but cannot pay. An account invested two-thirds in stocks and one-third in bonds would pay workers over twice what Social Security promises today.

The reform would also greatly increase and broaden the ownership of wealth and capital through the accounts. Under the chief actuary's score, workers would accumulate $7 trillion in today's dollars in their accounts by 2019.

The legislation provides for the full transition financing necessary to complete the reform:

• First, the short-term Social Security surpluses now projected until 2018 are devoted to financing the transition-instead of fueling other government spending. By separating the budget for Social Security, this plan will finally stop Washington's raid of the Social Security trust fund.

• Secondly, the bill includes a national spending limitation measure that would control the growth rate of federal spending to an average of 3.6% for eight years, rather than the current 4.6% projection. Those savings would then be devoted to the transition as well. In comparison, spending grew at an average rate of 2.6% during the Clinton years. The proposal, therefore, provides a vehicle and a constituency for beginning to get federal spending under control.

• The third transition-financing component is the additional revenue from corporate taxes that results from the new investment from the personal accounts. This concept has been developed over the years by Harvard economics professor Martin Feldstein.

• Finally, the bill provides that to the extent needed in any year, excess Social Security trust-fund bonds would be redeemed to continue to pay all promised Social Security benefits, with the funds to redeem them obtained by issuing new federal bonds to the public. Under the current system, these bonds will be redeemed for cash from the federal government anyway after 2018.

With the above transition financing, Social Security achieves permanent and growing surpluses by 2030. Before that time, an average of about $38.5 billion in new federal bonds are sold each year for 24 years to redeem surplus Social Security trust-fund bonds, for a total of $923 billion, all in today's dollars.

Most importantly, within 15 years after 2030, the reform produces sufficient surpluses to pay off all the bonds sold to the public during the early years of the reform, leaving the net impact of the reform on debt held by the public at zero. Moreover, in the process of the transition, the reform eliminates the $10.5 trillion unfunded liability of Social Security, an effective federal debt almost three times the current federal debt held by the public.

If this proposal had been adopted in 1983, when the Greenspan Commission recommended tax increases and benefit cuts, Social Security would be expected to go into permanent surplus in 2008, workers would have accumulated over $10 trillion in personal wealth in their accounts-retiring with higher benefits today, and Social Security's unfunded liability would have been cut roughly in half.

My proposal expands the Social Security framework to give each worker the chance to have ownership of real personal savings and investment, while maintaining a strong safety net for all seniors. This produces enormous benefits for working people, and for the nation as a whole.

Mr. Ryan, a Republican congressman from Wisconsin, is a member of the Social Security Subcommittee of the House Ways and Means Committee.

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