SSA Admits Private Plans Will Work

Published January 1, 2004

A December 1 memorandum from the Social Security Administration (SSA) to a renowned policy analyst marked the first time SSA has officially admitted private retirement plans will work.

“The chief actuary of the Social Security Administration confirmed the feasibility of every worker’s owning a substantial personal retirement account,” said Jack Kemp of Empower America.

Long-Term Solvency

The memo from SSA Chief Actuary Steve Gross to Institute for Policy Innovation (IPI) tax expert Peter Ferrara admits that, “Under the plan specifications described [by Ferrara] 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.” That statement contrasts with SSA figures that place the current Social Security system in bankruptcy within the forecast horizon.

“The SSA’s scoring turns traditional Washington-establishment thinking on its head,” says Ferrara. “The scoring reveals that large personal accounts would achieve permanent solvency for Social Security, without benefit cuts or tax increases, with manageable transition financing burdens. Up until now, establishment Washington has assumed that any personal account option for Social Security would involve at most 2 percentage points of the 12.4 percent Social Security payroll tax.”

“As we just learned with Medicare, however, the devil will be in the details of getting such a program through the Congress,” warned Kemp. “The devil in this case is a zero-sum mind set among many members of Congress from both parties who believe to their very core that Social Security reform is fundamentally about cutting future benefits for retirees and raising payroll taxes on workers.”

According to the SSA Web site, benefit cuts may be needed to keep the current system solvent. “If benefits were reduced to meet the shortfall in revenue for the (Social Security) program, the reduction would need to be 27 percent starting with the exhaustion of the Trust Fund in 2042 and would rise to 35 percent for 2077.” SSA Chief Actuary Gross confirmed those figures.

One alternative to benefit cuts would be a tax hike. According to the SSA Web site, “If additional revenue were provided beginning in 2042, revenue equivalent to a payroll tax rate increase of about 0.9 percent [from 12.4 percent under current law to about 13.3 percent] would be needed for the year. The additional revenue needed for 2043 would be equivalent to a payroll tax rate increase of about 4.6 percent for the year. Thereafter, the amount of additional revenue needed would gradually rise, reaching an amount equivalent to an increase in the payroll tax rate of about 6.5 percent for 2077 [or more than 50 percent higher than today’s rate].”

A Better Plan

Ferrara offers a third alternative: neither benefit cuts nor tax hikes, but instead a partial privatization of Social Security.

According to the SSA memo, here’s how the Ferrara plan would work.

  • Starting in 2005, all workers who will reach their 55th birthday on or after January 1, 2005 will have the option to enroll in the personal account plan.
  • Enrollees with earnings in Social Security-covered employment will have a portion of their payroll tax contribution redirected from the Trust Fund to an individual account. The progressive scale for contributions redirected from the Trust Fund is estimated to amount to about 6.4 percentage points of the 12.4 percent payroll tax rate on average.
  • Benefits withdrawn from the accounts would substitute for a portion of benefits otherwise promised by Social Security.
  • The government would provide a safety net guaranteeing each individual no less than the actual amount of money he or she was taxed from his or her earnings by the SSA. That would parallel the Federal Deposit Insurance program, which insures up to $100,000 of an individual’s savings in an FDIC bank. Disability or survivor benefits guaranteed by the current system would not be changed.

Gross’s staff at SSA concluded that the Ferrara plan, assuming conservative returns on individual accounts, would support all benefit obligations by 2055 and eliminate the deficits of the current program. The Social Security Trust Fund would never fall below $1.38 trillion, enough to fund 145 percent of a single year’s obligations. That is well in excess of the Social Security standard for solvency, which is based on 100 percent of annual obligations.

Everyone who crunched Ferrara’s numbers agreed that by 2055, his plan would allow Social Security payroll taxes to be reduced. If the Ferrara program were launched in 2005, by 2080, the tax rate could fall from 12.4 percent to 9.9 percent. At that point, two-thirds of the tax–6.4 percent–would continue funding personal accounts, while just 3.5 percent would remain under strict government control.

“The modernization of Social Security is not just a good idea–it is a necessity,” noted William G. Shipman, co-chairman of the Cato Institute Project on Social Security Choice. “Those seeking political office in 2004 will have to respond to voters’ questions about how they would reform Social Security. Fortunately for them, much of the work has already been done.”

Real Savings and Investment

In an article for the December 1 issue of the Wall Street Journal, Ferrara summarized the simple wisdom of his plan as follows: “All these tremendous benefits of the reform result because it involves shifting from the enormous, purely redistributive, pay-as-you-go program of today to an enormous real savings and investment program that sharply increases national wealth, income, and economic growth.”

Martin Feldstein, a former economic advisor to President George H.W. Bush, declared in a recent article in the American Economic Review that “a private investment plan even half the size of that proposed by Ferrara would likely increase national wealth in excess of $10 trillion.”

“Members of Congress, are you listening?” asked Kemp.

Jay H. Lehr is a senior fellow with The Heartland Institute. His email address is [email protected].