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Outside View: Social Security

Location: Washington, DC

Outside View: Social Security
By Rep. Paul Ryan, R-Wis.
Outside View Commentator

WASHINGTON, March 18 (UPI) -- With the first of the baby boomers beginning to reach retirement age in 2008, now is the time for Congress to enact reform that will put Social Security on a path to permanent solvency and ensure that the program will help future generations of seniors achieve a more secure retirement.

Those who deny or downplay the need for timely reform that strengthens and improves Social Security are ignoring several key truths.

First, demographic changes are making it much tougher for current workers' payroll taxes to support current retirees. In 1937, 42 workers paid into the program-about a 2-percent payroll tax-on behalf of every person receiving benefits. In 1950, 16 workers paid a 3-percent payroll tax to support one beneficiary. Today, just more than three workers pay a 12.4-percent tax to Social Security for every person receiving benefits, and this ratio will continue to shrink to two workers per retiree by the time today's young workers retire.

Americans are living longer and having fewer children and this alters the balance between the numbers of workers and retirees. Updating Social Security to address this demographic shift is critical if we are to succeed in fixing the program for the long term, so that the program will be there to help our children and grandchildren's generations.

According to the 2004 Social Security Trustees' report, in 13 years Social Security will begin paying out more benefits than it collects in revenues. This shortfall will force the government to find money elsewhere to make up the difference (either through tax hikes, spending cuts, or borrowing) if it is to keep its promise to beneficiaries.

Compounding the demographic crunch is the fact that the federal government has been using Social Security surpluses to finance other government spending for more than three decades. As a result, the "trust fund" is full of bonds that are essentially government IOUs and are not backed by cash or investments. In fact, the "trust fund" is quite literally a set of filing cabinets in Parkersburg, W.Va., where these paper bonds are stored. They are government's paper promises to pay back the money it has borrowed, and those who claim the trust fund will help us pay benefits without borrowing through 2042 are mistaken.

Finally, there's no denying that as time goes on, Social Security is becoming a poor deal for workers. When the program was created in 1935, the rate of return on a 40-year-old worker's investment in the system was about 8 percent. Today, someone that age can expect a dismal 1-percent return on the money they contribute to Social Security through their payroll taxes. And my young children will get about a negative-1-percent return on their contribution to the program, if Social Security remains the same.

Improving this rate of return must be a key part of any reform plan if Social Security is to help future generations of seniors enjoy a more secure retirement, as it has served current and past generations.

The legislative proposal I introduced last year with Sen. John Sununu, R-N.H., would achieve this by allowing younger workers to choose to divert a portion of their Social Security payroll tax-just more than 6 percent on average-into a tax-free personal account. Those who choose this option would own their own account, which would be invested within certain parameters for safety and soundness.

A model for this investment option is the Thrift Savings Plan that helps federal employees and members of Congress build savings for their retirement. Over the past 10 years, TSP enrollees have benefited from an average 7.67 percent rate of return. If this plan is good enough for Congress, why should Congress object to extending similar benefits to U.S. workers through the Social Security system?

To get a sense of the great potential that personal accounts have to boost workers' benefits under Social Security, consider the example of a 40-year-old husband and wife who each earn $35,000 a year. Under the Ryan-Sununu legislation, if this couple decides to participate in personal accounts where a portion of their payroll taxes is invested in a fund with two-thirds stocks and one-third bonds, they can look forward to retiring with nearly $830,000 in their combined personal accounts. Under the current Social Security system, when they retire in 2032, they receive $3,133 per month. With private accounts, their monthly benefit would be $6,605.

Another advantage of sizable personal accounts is that workers who choose to participate will have the opportunity to build substantial savings under Social Security that is their private property. Unlike the current system, personal account holders will be able to pass this money on when they die to their spouse, children, or other heirs. And because workers will actually own their own accounts, the government will no longer be able to use those Social Security contributions to finance other spending.

Those who say that realizing healthier returns through personal accounts should take a backseat to fixing the program's financial problems don't see that the two goals in fact complement each other. As younger workers' savings grow in voluntary personal accounts, over time these accounts take on more and more of Social Security's financial obligations. The chief actuary of Social Security has scored our legislation as achieving permanent and growing Social Security surpluses by 2025 and eventually eliminating Social Security's $10.4 trillion unfunded liability.

Ensuring that younger workers get a decent return on their payment into Social Security and pursuing long-term solvency for the program go hand in hand. Congress should make the most of this chance to help Social Security meet the challenges ahead, while honoring its promise to current and soon-to-be retirees.

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