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Promoting Active Healthy Aging


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By Newt Gingrich

Medicare and Social Security Systems for the 21st Century

The very success of more people living longer will require dramatic transformation in pensions, Social Security and health so that seniors can have active, healthy aging and long term living without the demands on Social Security, Medicare, and related government programs collapsing the current system.

Aging is a part of life. As we creep up in years our bones get achier. But the values, characteristics, and expectations of most Americans, and especially the baby boomers, are unchanged. We want to continue to lead productive, intellectually stimulating lives, have significance, and be physically active. We value our freedom and our dreams. We do not want age to define us, nor do we want age to eliminate our right to choose where and how we live. It is this American drive for independence that will lead to changes in how we think about the aging process and how we prepare financially for our health and retirement.

AARP conducted a national survey in mid-2002 in an attempt to define what individuals age 45 to 74 expected for the future. Of the 1,500 employed workers in that age group who were surveyed, a substantial majority (69%) reported they plan to work in some capacity in their retirement years. Why? Because they enjoyed working (76%) and/or they need the money (76%). Moreover, an overwhelming 84% said that they would continue working if "they won the lottery and were financially set for the rest of their lives."

The most interesting part of the survey was that more than a third of the respondents wanted to work part-time for pure interest or enjoyment. Another 10% said they wanted to open their own business and 6% said they wanted to work full-time doing something other than what they were already doing. Clearly, this group wants to stay active.

In 1998, AARP conducted a similar study for the younger boomers--those ages 34 to 52. The study found that 80% of the 2,000 people sampled said that they would work into their retirement years.

In 2002 Civic Ventures commissioned a survey of 600 randomly selected people ages 50 to 75. Peter Hart, the leader of this research, stated in a summary report, "It is not the idea of shuffle board, it is not the idea of sitting back in a rocker--these people want to be engaged." Hart found that 72% of all respondents said they believe retirement is a "time to begin a new chapter"; only 16% agreed that it is "a time to take it easy."

We may believe that a new chapter begins at 65. But in order to take advantage of that chapter, we need to prepare our bodies to physically and emotionally embrace the opportunities.

The baby boomer's desire to stay active is good news for the economy. There are legitimate concerns that when baby boomers retire there will not be adequate replacements for their jobs and that the lack of their income taxes will put a substantial dent in federal and state budgets. Government budgets will be strapped just as the number of individuals on Medicare and Medicaid will swell.

We must recognize that reforming Medicare and rethinking government rules for retirement to encourage economic activity are key steps toward a better future for the baby boomers. The policies that may have made sense in earlier eras when people died younger, exhausted by farm and factory labor (most Americans died by 63 when Social Security set its payment age at 65,) are simply not applicable in an era when more people are healthier longer and want to continue to stay active.

Active healthy aging requires us to develop policies for 21st Century Medicare and 21st Century Social Security Systems.


Medicare is a 40-year-old system created in 1965. The world has changed a lot in those 40 years, and an important first step to modernize it was taken in 2003 with the Medicare Modernization Act.

The historic 2003 Medicare and health savings account legislation was an extraordinarily important first step in the transformation of the American health and health care system that will save lives and money.

First and most significant, the legislation added for the first time an overdue prescription drug benefit for seniors and did so at a reasonable price. Had pharmaceuticals been as fundamental to staying healthy in 1965 -- when Medicare was created -- as they are today, there is little doubt that they would have been included in the original legislation. Over the years, as the drug industry developed more and more life-saving and life-enhancing drugs, the absence of affordable drug coverage for seniors became a glaring shortcoming of Medicare.

For example, it was increasingly nonsensical that Medicare would pay billions for kidney dialysis but not pay the pennies per day for the preventive-care drugs that let many people keep their kidneys healthy. Similarly, it made little sense for Medicare to pay billions to cover open-heart surgery but not cover the couple of dollars a day for statin drugs so that people could avoid surgery in the first place.

In this respect, the drug benefit not only will help keep our seniors healthy, but it will also save money in many cases by preventing health crises that require costly interventions for seniors.

However, the impact of this legislation extends far beyond the drug benefit. Through its creation of health savings accounts, the measure will begin to address the crisis in health care that affects all Americans, and also put Medicare on a surer footing in the future as it will promote healthier lifestyles.

These portable accounts allow individuals to deposit and grow money tax-free, and to withdraw that money tax-free to pay for qualified medical expenses, including prescription drugs and long-term care services (including long-term care insurance). As such, HSAs, which are owned by individuals, are the first completely tax-free account in American history.

If you are a fiscal conservative who cares about balancing the federal budget, this legislation has begun to move us away from the current model in which insurance companies dominate the health care transaction. Instead, the HSA will enable transactions between doctor and patient in which the patient controls how dollars are spent.

Health savings accounts will encourage individuals to shop for health plans that best fit their needs and to make cost-conscious decisions about how they spend their own health dollars as opposed to a third party's money. Individuals who control their own health dollars will be wise purchasers of health services.

With health costs accounting for nearly 14 percent of U.S. gross domestic product, the HSA represents the single most significant transformation that can be made in saving the country from skyrocketing health costs and steadily increasing calls for taxpayers to finance more and more of the health care system through higher taxes. Transformation of this nature is a practical need when so many Americans are without health insurance and when those with (or supplying) insurance coverage have experienced double-digit premium increases for three years in a row.

The next balanced budgets will only be possible once there is a transformation of the health system, and part of the key to this transformation will be the existence of health savings accounts. Without the first dollar interest in the payment of health expenses, there is little incentive on the part of the patient/consumer to scrutinize a doctor's bill.

And without transparency in costs, as well as cost comparison information, it is even more difficult for individuals to assess the true value of a health service and either challenge the bill or decide to take their health business to a different provider who offers better value.

Transformation in health care is also a moral imperative when poor quality-control systems, scarce information about expected outcomes, unacceptable error rates and lack of consumer choice combine to threaten the safety of patients and limit the opportunities for individuals to find appropriate and affordable treatment. The 2003 legislation began to tackle these problems by correcting the current practice in which quality outcomes have no bearing on the reimbursement structure. A provision in the bill will give hospitals incentives to invest in information technology and report on quality outcomes, so people will be able to compare quality outcomes among hospitals.

Medicare must be further strengthened to include a focus on outcomes-based healthcare. The current budgetary structure is clearly biased in favor of reactive care. Presently, there is a different budget for inpatient services and outpatient services. Even within these larger budgets, programs are compartmentalized.

A representative example of this illogical budgetary process is in durable medial equipment (DME). The DME department has to stay within its own budget, therefore purchasing decisions are made based on what the individual department can afford. No consideration is given to the fact that if DME purchases a $15,000 power wheelchair that reclines so that the user can shift his weight during the day, significantly reducing the risk of pressure sores that require hospitalization and surgery, it will save the acute care department a minimum of $30,000.

This type of compartmentalized budgeting is not compatible with the opportunities of the 21st century. It is illogical, irrational, and unethical. It should not matter if a patient is treated in a hospital, in a doctor's office, or in their home. The flow of resources should follow the patient and not driven by a series of bureaucratic structures. As medicine continues to develop new technology to help people avoid sickness, infection, and disease, it is illogical not to account for the money saved by the decrease in invasive and costly procedures and expensive hospitalization.

Budgetary officers should develop a single outcomes-based budget so doctors can focus on taking care of the whole person without modifying what is medically best for the patient to fit Medicare's reimbursement structure. Without a total overhaul of the budget practices of Medicare and the scoring procedures (i.e. the process of actuaries assessing how much a change in procedure being proposed in a bill will cost the government long-term) of Congress and the White House, there will never be an appropriate focus on prevention.

The natural order of the 21st century economy is continually to have more choices, of greater quality, at lower costs. It is what 70 million baby boomers have come to expect in most areas of their lives, with the health and health care system a glaring aberration.

Yet, much more needs to be done. America needs a 21st Century Intelligent Health System. Medicare must be a part of that more effective system.

In essence, Medicare (and Medicaid) must continue to evolve into an individual-centered health system that emphasizes healthy living, early detection and the kind of patient self-knowledge that will be a radical departure from current best practices. The latest health information technology will allow everyone to have a comprehensive, personal electronic health record that updates in real time in a paper-free environment. Patients will emerge the biggest winners.

The more important reason to transform Medicare is that the program shortchanges beneficiaries. It relies on outdated third-party payment and rigidly defined government benefits and prices that are biased in favor of reactive and episodic acute care. Medicare, for example, sets prices for more than 10,000 procedures in 3,000 counties. Such a system would have devastating effects on innovation and customer service if it were applied to supermarkets or car repair shops.

Beneficiaries do not realize that the information they get about their particular ailment tends to be limited to what is paid for by Medicare. It is impossible for a centrally planned bureaucracy to keep up with the most cutting-edge knowledge and treatments, especially when there are no financial incentives for it to do so. Provider withdrawal from both programs continues unabated.

This transformation will take place because good health is not only the right moral goal-it is cheaper. Fully one-quarter of the entire federal budget is being spent on health in 2005. Both Medicare and Medicaid have grown exponentially, beyond original fiscal projections, and their trajectories pose a serious threat to other budgetary priorities and to overall long-term economic growth. Our economic future is bleak if we as a nation do not get a handle on runaway health expenditures.

Transformed Medicare and Medicaid programs will maximize individual choice by providing clear and understandable information about quality, outcomes, best practices and prices. They will create the right incentives for individuals and health plans to achieve optimum health outcomes. This will require not only wise policy decisions by our elected officials but entrepreneurial management by committed public servants.

There are 40 years of accumulated bureaucracy, rules and regulations anchoring the current systems to the past that must be circumvented. The plan of the best chief executive officer is of no value if his or her lieutenants do not follow through on the vision.

The government should also incentivize people to purchase long-term care insurance. Many people are surprised that Medicare does not adequately cover home care or a stay in a nursing home longer than 100 days when either they or their loved ones are becoming less independent. Without long-term care insurance, the family's only option is to spend down their assets or their parent's assets to become eligible for Medicaid. The final years of life for a Medicaid recipient involve roommates and shared televisions, telephones, and bathrooms. This fate could be avoided if we purchased long-term care insurance for our loved ones and ourselves.

Currently, long-term care insurance, like health insurance, is not tax deductible in many states. Out-of-pocket costs and private long-term care insurance make up roughly one quarter of all long-term care funding. Over 75% comes from Medicare or Medicaid. A focused effort should be made to reverse that ratio. A first step would be to provide a tax credit for purchasing long-term care insurance so people will be reminded every year

Medicare must also shift to supporting long-term living that emphasizes capabilities instead of disabilities. Look for Medicare Advantage plans to offer heavy incentives for seniors to participate in fitness programs such as Silver Sneakers. Seniors who are active and social are considerably better off physically and emotionally.

Medicare beneficiaries will become more Internet-savvy every year. They will demand quality information about physicians, hospitals, drugs, treatments and devices.

The Web site has a new section, Hospital Compare, that allows users to see how their hospital of choice stacks up against the national average. The sophistication of this site will grow every year. There are dozens of similar sites, such as, that do the same thing. Information on drug interactions, prices and recalls will become ubiquitous, as well.

Medicare could also allow beneficiaries to opt into a private health-insurance plan of their choice partially subsidized by Medicare dollars. A voucher in the amount of $2,500 annually (roughly one-third of what Medicare spends for the average beneficiary per year) would stimulate a tidal wave of innovative plan arrangements and therefore promote consumer choice. For many Americans, especially those arriving at age 65 with significant balances in their health savings accounts, or HSAs, this option might be very attractive.

A 25-year-old who contributes $2,000 annually to an HSA beginning in 2005 will have $127,000 accumulated in 40 years, provided he or she earns 5% interest and withdraws an average of $1,000 per year for medical expenses. Even adjusting for inflation, that is a tidy sum. Lawmakers also should consider repealing Section 4507 of the Balanced Budget Act of 1997 that bans private contracting between doctors and Medicare beneficiaries. This provision has a considerable chilling effect on patient choice.

Tomorrow's Medicare and Medicaid programs will emphasize health, diet and exercise as much as they will emphasize acute care. Both programs will do so because it makes the most economic sense. Unlike during the managed-care era, this kind of economic sense will be in the patient's best interest. Saving lives and saving money need not be mutually exclusive.


We Need a Good Deal for Workers

In the 2005 Social Security reform debate, Washington politicians decided that it was better to make workers change than to have to change themselves. They thought that raising taxes and cutting benefits was the only Social Security solution. If they actually set out to implement a solution that was a good deal for workers -- especially young workers -- they would enjoyed far more success, even it had required to make some tough choices.

If Washington had been serious about Social Security reform, politicians would have put an immediate stop to the continuing raid on the Social Security surplus. Not allowing politicians to spend the Social Security surpluses would force them to be honest about how much money they are already spending and the deficit would have to be reported as much larger than it already is.

The truth is that not only have all Social Security surpluses to date been spent on other things, the politicians in Washington want to go right along spending all future surpluses.

Raising taxes, as even some Republicans proposed during the Social Security debate of 2005, will provide Washington only more money to spend. Since not one dime to date has been set aside to protect Social Security, why would anyone think that would ever happen in the future? Raising taxes would only mask the problem, allowing Washington to continue to raid the surpluses and leave Social Security even worse off.

Personal social security savings accounts owned by workers with higher benefits is the only way to ensure that money meant for retirement will not be spent. With large personal social security savings accounts, even low- and moderate-income workers will accumulate hundreds of thousands of dollars by retirement and will be able to leave a financial legacy to their children or other heirs. Personal social security savings accounts offer workers far greater personal choice, ownership and control than the current system.

Personal social security savings accounts that are large enough (around 6%) will also eliminate the long-term deficits of Social Security by shifting so much of those program's promised future benefit obligations to the accounts that the program will be left in permanent surplus. Despite what has been said, personal social security savings accounts do solve the problem as confirmed by the chief actuary of Social Security, who has scored four personal social security savings account proposals as saving the program from bankruptcy without tax increases or cuts in future promised Social Security benefits.

The Basic Structure of Social Security

Social Security is the single largest federal program and bigger than the entire budget of most countries. For fiscal year 2005, the Social Security payroll tax is projected to raise $575 billion, or 28 percent of total federal taxes for the year. Social Security expenditures are projected to be $515 billion, or 21.5 percent of total federal spending.

We spend more on Social Security than on national defense, even in a time of war. National defense spending in 2005 is projected to be $451 billion, 12 percent less than Social Security expenditures. For fiscal 2006, defense expenditures are projected to be 18 percent less than Social Security spending.

Social Security was enacted in 1935 as a central component of Franklin Roosevelt's New Deal. It was financed by a new payroll tax of 1 percent on both employer and employee, assessed on the first $3,000 of wage income each year. This resulted in a maximum annual tax of $60 for each worker, which stayed at that level until 1950, when it was raised to $90. In return for the tax, the program paid benefits to retirees after they reached age sixty-five.

As early as the mid--1970s, actuaries began predicting that tax revenues would eventually be insufficient to pay promised benefits. Congress responded in 1977 by passing amendments designed to "fix" the problem. President Jimmy Carter proclaimed that they would ensure the solvency of Social Security "for the rest of this century and well into the next one." But just a few years later, in 1981, the program's actuaries were back again projecting that the program would run short of funds within a few years.

President Reagan's budget director David Stockman developed a plan to close the gap for a while by reducing the rate of growth of Social Security benefits. Before the administration could even formally propose the plan, the Senate voted 96--0 on a resolution asking the president not to even send the proposals to Capitol Hill. This led to the formation of a bipartisan commission chaired by Federal Reserve chairman Alan Greenspan.

Through the commission, the administration negotiated a final package that for the first time relied more on restraining benefits than on raising taxes. The 1983 amendments kept Social Security paying the bills, but the actuaries continued to project an enormous, never-ending financial gap. The latest annual report of the Social Security Board of Trustees projects that Social Security will run short of funds to pay promised benefits in 2042.6 Workers born in 1975 can expect to be retiring that year.

There is one basic feature in the structure of Social Security that is central to all of its problems and key to understanding the real solution: Social Security operates on a pay-as-you-go basis. This means the taxes of today's workers are not saved and invested to finance their future benefits but are paid out to finance the benefits of today's retirees. The future benefits of today's workers will be paid out of the future taxes of those who are working at the time. Social Security as structured today is a redistribution system, not a savings and investment system.

Even the current short-term annual surpluses are not saved and invested. Those funds are lent to the federal government in return for IOUs held in the Social Security Trust Fund. The government then spends that money on everything from welfare to State Department embassies. For example, about 90 percent of the current Social Security tax revenues of $575 billion will be spent this year on Social Security benefits of $515 billion. This means $60 billion will be lent to the federal government for more Social Security Trust Fund IOUs and spent on the rest of the federal government's $2.4 trillion budget.

Social Security's Long-Term Financing Crisis

A poll in the early 1990s found that more than twice as many young adults believed in UFOs as believed Social Security would still exist by the time they retire. Those young adults were on to something. Continuing to pay all promised benefits would require a massive rise in the total payroll tax rate from 12.4 percent today to about 18 percent--a 50 percent increase. Moreover, the tax would have to be raised every year thereafter as the cost of full benefits as a percent of taxable payroll continues on a permanent climb. The projection stops in 2080 when the payroll tax rate would have to be close to 20 percent to pay all promised benefits. Then the increase would have to continue indefinitely after this as well.

In fact, the true financial crisis starts much sooner than 2042. In year 2018, the system will begin to run a deficit. In order to keep paying benefits, the trust fund will have to start turning in the IOUs it has been accumulating to get extra cash from the federal government. To get that cash, the government will have to raise taxes, cut other spending, or increase its deficits and borrow. From 2018 until the trust funds run out in 2042, the federal government will have to come up with an additional $8 trillion in today's dollars for Social Security in order to keep paying all promised benefits during that period. That is a huge financial crisis, starting just thirteen years from now.

If Social Security were a fully funded savings and investment system, then enough reserve assets would be on hand to pay all the future benefits that had been earned at any point. By contrast, in the current pay-as-you-go system, we must continue to bring new workers into the economy and tax them at higher and higher levels in order to fund the growing number of retirees.

Most people know that the large baby boom population is one reason for the potential crisis. Birth rates soared soon after the soldiers returned home from World War II and remained at a high level until the early 1960s. Those born during this period will begin retiring in hordes less than ten years from now, causing Social Security benefit obligations to soar.

But that's only half the story. The baby boom was followed by a baby bust. The development of the birth control pill, the legalization of abortion, and changing social attitudes led to a sharp decline of birth rates starting in the early 1960s. This occurred not only in the United States, but in all Western countries, much more so, in fact, in Western Europe.

The U.S. fertility rate declined from 3.8 in 1957, to 2.43 in 1970, to 1.77 in 1975.9 The fertility rate needs to be at least 2.1 to maintain a stable indigenous population. But the U.S. rate stayed well below this level until 1990, when it climbed back up, around 2.1, where it has stayed since that time.

What this means is that just as the baby boom generation retires, the generation of workers behind them will be experiencing much slower growth. This is a disaster for a pay-as-you-go system like Social Security. Just when benefit obligations will be soaring due to the retirement of the baby boom generation, the growth of taxes paid by the baby bust generation of workers behind them will be slowing down.

Population increases due to immigration make America better off than Europe or Japan, but nonetheless there will be considerable financial pressure on the children and grandchildren of the baby boomers if we stay with the current static model of income transfers between generations.

Another major factor causing the long term Social Security financing crisis is increasing life expectancy. The baby boom generation is not only large, but it is expected to live much longer than previous generations, resulting in greater benefit obligations for Social Security.

In 1940, when Social Security was starting, life expectancy was 61.4 years for men and 65.7 for women.10 Social Security's promise to pay full benefits, starting at age 65, was actually a promise to pay those benefits to less than half the population.

But today, life expectancy is about 74.4 for men and 79.5 for women. By the time those entering the work force today start retiring, Social Security's actuaries project that life expectancy will have increased to 79.2 for men and 83.3 for women. And that projection is based on a decline in the rate of increase in life expectancy we have experienced since 1940. More likely, with the high-tech medicines of the twenty-first century, life expectancy will increase faster, not slower, than in the last half of the twentieth century.

These are the reasons why the number of workers paying taxes to Social Security has declined from 4.2 in 1945 to 3.3 today per retiree.13 It is projected to fall to 2.0 workers per retiree by 2040.14 The prospect of longer lives for Americans would turn from a great joy to a great burden and could even lead to intergenerational bitterness.

Consider Europe's present pension crisis. Virtually every European government will continue to face huge budget deficits as the number of people receiving retirement pensions increases while the number of people still working and paying taxes stagnates and declines. Reforming Social Security with personal social security savings accounts would save us from a similar fate.

We Can Do Better

But there is an even bigger problem for Social Security than its long-term financing crisis. The program is no longer a good deal for working people today. Even if the program could pay all its promised benefits, the benefits would still represent a low, below-market return on the huge taxes workers and their employers now pay into the program. If today's workers could save and invest instead in their own personal social security savings accounts, they would likely receive far higher returns and benefits than Social Security now promises them, let alone what it can pay. With a long investment time frame, the risk of investing in the financial markets is significantly reduced.

The long-term real rate of return on corporate stocks is at least 7.0 to 7.5 percent.15 In fact, going all the way back to 1926, when the most reliable data starts, the real rate of return on large company stocks listed on the New York Stock Exchange has been 7.5 percent.16 The real return on smaller company stocks on the Exchange has been even higher, at 9.2 percent. This period covers the Great Depression, World War II, more intermediate-size wars, the turbulent inflation/recession years of the 1970s, and the recent high-tech bubble collapse. The long term real return on corporate bonds has been around 3.5 percent. At these rates, a portfolio of half stocks and half bonds over a worker's career would earn a net annual real return of 5 percent. A portfolio of two-thirds stocks and one-third bonds over a working career would earn a net real return of 5.75 percent.

By contrast, Peter Ferrara and Michael Tanner, in a Cato Institute study, calculated that for most workers--middle aged and younger--the real rate of return on the taxes they and their employers pay into Social Security would be 1 to 1.5 percent or less. For many it would be zero or negative.

One example in the Ferrara and Tanner study calculated the real rate of return promised by Social Security for a two-earner average income couple. The husband earned the average income for males each year and the wife earned the average income for females. Again, assume Social Security somehow is able to pay all of its promised benefits. The real rate of return this couple would receive on the taxes paid by them and their employers would be less than 1 percent--0.78 percent. For an average-income single worker, the real return would be even less, 0.31 percent. A widely noted Heritage Foundation study21 found quite similar results, as have others.

But the outlook is even worse, since we know that Social Security will not be able to magically pay all of its promised benefits. Under the current system, either taxes will have to be increased by more than 50 percent, or benefits will have to be cut by 40 percent or more, or some combination of the two. This would dramatically lower the returns discussed above. Most workers would then expect a zero or even negative real rate of return. In other words, instead of getting a return on your savings, you are currently transferring your savings as taxes for a payout that may be less in benefits than what you and your employers paid in over your career--a negative rate of return. No one would find that acceptable when investing in the stock or bond market.

This large difference in returns adds up to an enormous difference in accumulated assets and benefits over a lifetime of work, investment, and retirement. Take the case of an average two-income couple noted at the outset. Suppose they could invest in a personal social security savings account over their entire careers equivalent to the account proposed in the Ryan--Sununu bill discussed later in this chapter. With two-thirds invested in stocks and one-third invested in bonds, and earning standard market returns, they would reach retirement with almost $1 million in today's dollars. That would be enough to pay them twice what Social Security promises but cannot pay.

Why this enormous gulf between the payouts of personal social security savings accounts and Social Security? Unlike Social Security, the personal social security savings accounts operate as a fully funded savings and investment system. The money paid in is saved and invested in America's companies through the financial markets. These capital investments increase production, which provides more resources to pay workers higher benefits.

African Americans Get the Worst Deal in Social Security

The poor deal offered by Social Security applies with a vengeance to African Americans because they have much shorter life expectancies than the general population. Consequently, they have fewer retirement years to collect benefits. A black male born today has a life expectancy of 65.8 years, while the Social Security retirement age by the time he retires is age sixty-seven. This means African Americans on average receive even lower returns on the taxes they pay into the system. The Heritage Foundation study calculated that a single black male born in 1970 could expect a real return from Social Security of --1.5 percent, even if all promised Social Security benefits were somehow paid. The return for an average-income two-earner family with children is effectively 0 percent.

With personal social security savings accounts, workers who die before retirement or just after retirement would be able to leave the funds to their children or other heirs. Moreover, social organizations like the National Association for the Advancement of Colored People (NAACP) could offer annuities promising a monthly benefit for life focused exclusively on their African American membership. Those annuities could then take into account the lower life expectancies of African Americans and pay higher retirement benefits. If one group has the most to gain from personal social security accounts, it is African Americans.

Hispanics and Social Security

Hispanics also suffer from a special problem under Social Security. The Hispanic population is much younger than the general population, and since the return paid by Social Security is falling over time, younger populations get lower returns on average than others. Only 5 percent of Hispanic Americans are over sixty-five, compared to 12 percent of the general population.26 Moreover, only about 30 percent of Hispanic Americans over sixty-five receive any retirement income from assets, compared to 68 percent of the general population. Clearly, Hispanic Americans are among those who would also have a lot to gain from a personal social security savings account option for Social Security.

Married Working Women and Social Security

Working women would get a much better deal with personal social security savings accounts. A working woman is entitled to retirement and survivor benefits under Social Security based on the taxes her husband and his employers paid. If she works, she gets the benefits only if they are higher than her own projected Social Security benefits. She gets no additional benefits for all her years working and paying into the system. If, however, her own Social Security retirement benefits are higher than her husband's record, then she gets those benefits but loses the benefits she would otherwise be entitled to from her husband. With personal social security savings accounts, by contrast, both husband and wife retain control over all the investments and savings they have paid.

Social Security and the Economy

About thirty years ago, Harvard economics professor Martin Feldstein, chairman of the National Bureau of Economic Research, began writing about the effects of the rapidly growing Social Security system on the economy. His conclusion was that Social Security was becoming a major drag on the economy.

Feldstein found that because workers assume Social Security will pay for their retirement, they don't save for it, or sharply reduce what they would otherwise save. Since Social Security operates as a pay-as-you-go system, with no real savings, the result is a net loss of actual savings and investment. With the Social Security taxes that finance retirement benefits currently running at about $575 billion a year, or about one-fourth of total annual private savings, the net loss is huge.

Feldstein buttressed his analysis with substantial econometric work concluding that Social Security reduces national saving by 40 percent or more. Studies by others have varied from finding similar results to results only about half as large. But even at the lower estimates, the loss of savings and investment would reduce America's gross domestic product (GDP) by about 5 percent each year. At Feldstein's original estimates the loss of GDP would be about 10 percent a year. With GDP currently running about $11 trillion a year, we are talking about losses in the range of $500 billion to a trillion dollars a year.

But there is still more. The payroll tax sharply reduces the net wages workers receive for working. The loss of savings and investment means lower productivity and so less wages as well. This reduces the labor supply and causes other distortions in the labor markets. Feldstein estimates that the result is another loss of GDP of 1 percent a year.

Modernizing Social Security through personal social security savings accounts would raise take-home pay and free workers to put hundreds of billions and ultimately trillions of dollars in savings and investment; that would be a huge benefit to our economy. The accounts indeed represent a new, very large tax-free shelter for saving and investment. It would be the equal of a capital gains tax cut to further stimulate the economy. All of this adds up to a dramatic increase in savings and investment--and an economic boom.

The Ryan--Sununu Bill

Is all this a pipe dream? Something that can never happen politically? No.

Last summer, Representative Paul Ryan and Senator John Sununu introduced a bill in the House and the Senate that provides for a personal social security savings account option for Social Security and solves the long-term problems of the program. The bill offers one of the most sweeping, fundamental reforms in our nation's history.

The bill has been officially scored by the chief actuary of Social Security to determine its impact on Social Security and federal finances. The chief actuary reported that under the reform plan, "the Social Security program would be expected to be solvent and to meet its benefit obligations throughout the long-range period 2003 through 2077 and beyond." The reform eliminates completely the unfunded liability of Social Security, currently officially estimated at $11 trillion. This is effectively the largest reduction in government debt in world history. Moreover, the Ryan--Sununu reform plan would actually cut taxes and increase benefits over time.

The reform plan starts producing surpluses by 2030. Those surpluses are first devoted to paying off the debt issued in the earlier years of the reform. After that is completed by about 2045, the surpluses go to reducing payroll taxes under an automatic payroll tax cut trigger specifically included in the bill. Under the chief actuary's score, the surpluses would be sufficient to reduce the total payroll tax eventually to about 4 percent, 2 percent each for employer and employee. Workers and employers would still contribute a total of 6.4 percent in addition for the accounts. But this is money that belongs to the workers in their own individual accounts, so it is not a tax that goes to the government. And remember that this is an alternative to raising the current 12.4 percent total payroll tax to 20 percent, as would be required to pay all benefits promised under the current law. The Ryan--Sununu plan would be effectively the largest tax cut in world history.

The reform would also greatly 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 within the first fifteen years, by 2020. This huge, breakthrough gain in the prosperity of working people would have broad implications throughout our society.

Many more people would have an ownership stake in America's businesses. Support for free market policies would be shared more generally throughout our society. That would translate into more rapid economic growth and more prosperity for everyone, with no tax on the returns to the accounts, no tax on the benefits paid from the accounts, and no estate tax when account funds are left to children or other heirs.

The full potential economic gain from such reform has not been fully appreciated. All of the high-tech advances that beckon in the twenty-first century will require huge amounts of capital to achieve full practical application. The Ryan-Sununu reform will help provide the capital for a sweeping technology revolution that in turn will make returns on personal social security savings accounts potentially higher than we can predict using older models of economic growth.

Democrats argue against personal social security savings accounts by saying that workers should not be fooled into trading a guaranteed benefit (by which they mean the current Social Security benefits, which, in fact, are not guaranteed), for a speculative one (by which they mean personal social security savings account benefits). But the Ryan--Sununu plan does not involve any such tradeoff. The legislation includes a federal guarantee that those with personal social security savings accounts would get at least as much as promised by Social Security today (which, again, the current system cannot pay, according to official government projections).

The cost of this guarantee was scored by the chief actuary of Social Security and is fully paid for under the reform plan. The guarantee works because capital market investment returns are so much higher than what Social Security promises; let alone what it can pay. Indeed, with workers choosing investments only from a list of fully diversified portfolios managed by top professional companies approved and regulated by the government, Peter Ferrara argues that even the chief actuary's estimated cost is surely excessive.

The Challenge of Historic Reform

For conservatives, such personal social security savings account reform could not be a bigger or more urgent issue. By shifting fundamentally all Social Security retirement benefits to the personal social security savings accounts over the long run, and financing part of the transition by reducing the rate of growth of federal spending, the Ryan--Sununu bill will ultimately reduce federal spending by roughly 6.5 percent of GDP. That, in fact, is a must if we are to avoid an explosion of federal spending relative to GDP that will result under current federal policies.

Personal social security savings accounts will in fact fulfill the promise that the Social Security system cannot deliver: a guaranteed retirement account. President Franklin Roosevelt and President Ronald Reagan would both be pleased.

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