Ferrara - Social Security Reform

8/3/2019 Ferrara - Social Security Reform

1/13

February 2012

POLICY PAPER

Social Security Reform:

Freedom and Prosperity for American Workers

www.AmericansForProsperityFoundation.com

By Peter Ferrara*

Published by:

According to the governments own reports, Social Security is on a path to scal ruin. With a rapidly

aging Baby Boom population and lackluster growth in the number of workers to support them, mas-sive benet cuts and/or tax increases are coming in the not-so-distant future for the program unless

it can be signicantly restructured. However, payroll taxes nancing the program are already quite

high and cutting benets would make what already turns out to be a bad deal for workers even worse

The solution is to allow each worker the freedom to divert their payroll taxes into a per-

sonal savings account, as adopted in Chile so successfully 30 years ago. Social Secu-

ritys ofcial actuaries have already estimated that such a proposal would achieve full sol-

vency for the program. Moreover, through personal accounts workers could earn full,

standard, long-term market investment returns which would signicantly outpace the cur-

rent returns workers are promised in the Social Security program (let alone what it will ac-

tually be able to pay given its troubled nances). Adopting such accounts would resultin the largest reduction in government spending and the largest tax cut in world history.

SUMMARY

*Peter Ferrara is Director of Entitlement and Budget Policy at the Heartland Institute and General Counsel of

the American Civil Rights Union. He served in the White House Ofce of Policy Development under Presi

dent Reagan and as Associate Deputy Attorney General under President George H.W. Bush. He is a colum

nist at Forbes.com and Spectator.org, and author ofAmericas Ticking Bankruptcy Bomb (HarperCollins, 2011)

Social Securitys Current Structure Social Security with Personal Savings Accounts

Workers see payroll taxes take a big chunk out of every

paycheck. Those funds are then funneled through

Washington to pay for current retirees benefits. Its a

pay-as-you-go system that for decades has counted on

fewer and fewer workers to pay for each retiree.

Workers have the choice to put all (or a portion) of thosesame payroll taxes into a savings account that they ownand control, allowing them to accumulate wealth overthe years and fund their own retirement.


2/13www.AmericansForProsperityFoundation.com 2

Introduction: What Is Social Security and How Does It Work?

Social Security was created in 1935 to provide a oor of income for seniors, survivors,

and the disabled. It has two parts. When we think of Social Security, we usually think

of the Old Age and Survivors Insurance (OASI) program, which provides monthly

checks to seniors in retirement. OASIs full retirement age is currently 66 and rises to

67 for those born in 1960 or later.1 There is also the Social Security Disability Insur-

ance (SSDI) program, which provides supplemental income to people who are unable

to work, usually due to a physical disability. Social Security is the single largest expen-diture in the federal budget, costing taxpayers over $730 billion in scal year 2011 and

consuming over 20 percent of the entire budget.2

20.3%

13.5%

7.6%

Entitlement Spending in the Federal Budget, 2011

Social Security Medicare Medicaid Other Federal Spending

Social Security is funded primarily with payroll taxes, the Federal Insurance Contribu-

tions Act (FICA) taxes coming out of every workers paycheck. That tax started in 1937

at a 1 percent rate paid by the employer and a 1 percent rate paid by the employee on the

rst $3,000 of wages earned by a worker each year. Today the rate is a combined 12.4

percent, with 6.2 percent paid by the employer and 6.2 percent paid by the employee on

the rst $110,100 of wages earned each year.3 In 2011 and 2012, Congress temporarily

reduced the employees portion of the tax to a 4.2 percent rate.

FICA taxes collected from current workers pay for the benets of current retirees and

disabled individuals known as a pay-as-you-go system. Surplus taxes are put intothe OASDI Trust Fund. There are two important points to consider about this nancing

structure. First, the common belief that taxes paid by todays workers are saved and in-

vested by Social Security to nance the future benets of those same workers is simply

not true. Instead, taxes paid by todays workers are immediately paid out to nance

the benets of todays retirees a tax and redistribution system rather than savings and

investment.4

Second, for many years Social Security had annual surpluses more money was coming

in through payroll taxes than was being paid out for Social Security benets. Over the

years, the OASDI Trust Fund has built up over $2.6 trillion in these surpluses.5 How-



ever, another common belief, that the Social Security Administration has these surpluses

sitting in a secure account or invested somewhere to take in additional earnings (as most

pension plans do), is also untrue. In fact, the surpluses were lent to other parts of the

federal government to be spent on general federal expenditures everything from for-

eign aid to bridges to nowhere.

In return, the OASDI Trust Fund received special-issue Treasury bonds, government

IOUs that presumably could be turned in for cash when needed to pay benets in the

future. But as the Clinton administration explained a decade ago, this is nothing morethan a bookkeeping ction:

These [Trust Fund] balances are available to nance future benet payments and other Trust

Fund expendituresbut only in a bookkeeping sense. These funds are not set up to be pension

funds, like the funds of private pension plans. They do not consist of real economic assets

that can be drawn down in the future to fund benets. Instead, they are claims on the Treasury

that, when redeemed, will have to be nanced by raising taxes, borrowing from the public, or

reducing benets or other expenditures. The existence of large Trust Fund balances, therefore,

does not, by itself, have any impact on the Governments ability to pay benets.6

Because Congress has spent every penny of the $2.6 trillion in Social Security surplus,it is now considered debt that the government owes to itselfwhich is why the Trust

Fund is actually counted as a part of our $15 trillion national debt. Whats worse, the

Supreme Court has already ruled that individuals have no property rights in the future

payments from Social Security.7 In other words, those obligations to beneciaries

dont even really exist. So long as Social Security was running surpluses, this account-

ing fantasy could be conveniently ignored. But the situation is much different today.

Social Securitys Insolvency

Social Securitys insolvency is not far off into the future as some would suggest. Its

here today. In 2010, for the rst time since the early 1980s, Social Security ran a cashdecit meaning that payroll tax revenues coming in were not enough to cover ben-

ets being paid out. The Trust Fund, that bookkeeping ction, will begin to be depleted

rapidly in 2023 and is projected to run out of money by 2036. Looking further into the

future, Social Security faces total unfunded liabilities of nearly $18 trillion.8 Thats $18

trillion of promises made to the American people that cannot be kept unless we hike

taxes, cut benets, increase the federal debt even further, or inate it away a huge drag

on the American economy, a huge disappointment to future retirees, or a huge burden on

our children and grandchildren.

The main reason we are seeing these problems now is that demographic trends have

exposed major aws in the programs design. Using contributions from todays workers

to pay for todays retirees worked well 60 years ago when there were 16 workers paying

in for every retiree taking out benets. But today there are more retirees, people are liv-

ing longer, and the labor force is shrinking. The rst of 79 million people from the Baby

Boom generation hit retirement age last year, with only 66 million people in the genera-

tion behind them to pay their benets. When Social Security was created, life expectan-

cy was just over 60 years. Today it is 78,9 and when people live longer their retirements

tend to be longer as well, requiring more benets to be paid out. The labor force partici-

pation rate is at its lowest level in nearly 20 years, meaning a lowerpercentage of people

are generating wages subject to the payroll tax.10

Thats $18 trillionof promises made

to the American

people that cannot

be kept unless we

hike taxes, cut ben-

ets, or increase

the federal debt

even further.



16.5

3.7 3.4 2.92.1

0

2

4

6

8

10

12

14

16

18

1950 1970 1990 2010 2030*

Source: SSA Data * = Projected

Number of American Workers per OASDI Beneficiary

As a result, that 16-to-1 ratio of current workers to retirees has fallen to 3-to-1 and will

continue to fall further in the coming years.11 In short, the pay-as-you-go model is

simply not sustainable given these demographic pressures.

Social Security Is a Bad Deal for Working People Today

In addition to being headed for scal disaster, Social Security in its current form also

turns out to be a bad deal for workers. If Social Security payroll tax contributions were

saved and invested to pay for future retirement benets, like in a typical retirement

system, those payments would earn investment returns that could accumulate to huge

amounts over a lifetime. But as we saw above, this is not actually what happens. In-

stead of saving and investing workers payroll tax contributions, Congress spends every

penny on current beneciaries (or, in the days when there used to be surpluses, on their

own pet projects). The system can only pay a return to workers using the meager inter-est payments on the Trust Funds government IOUs (interest payments that come out of

taxpayers pockets anyways) or if payroll tax revenues grow over the years.

According to the Social Security Administrations own estimates, a typical workers

payroll tax contributions will come back to them with returns of just 2 to 3 percent in re-

tirement. The deal gets even worse for young people (who will see returns of only about

1.5 percent) and higher earners (who will receive near zero returns over a lifetime).12

However, independent evaluations have found even those dismal estimates to be much

too rosy, not reecting the experience of real families. For most workers today, even if

Social Security does somehow manage to pay the promised benets that it cannot cur-

rently afford, those benets would represent a real rate of return of just 1 to 1.5 percentor less. For many, the return would be zero, or even negative.13

Compare this to returns that workers could receive if they had the freedom to invest

their payroll tax contributions in stocks or bonds instead. In his denitive bookStocks

for the Long Run, Wharton Professor Jeremy Siegel shows that the long-run real return

on corporate stocks is about 6.8 percent, with a remarkable consistency over more than

200 years.14 Corporate bonds offer a slightly lower return in exchange for less risk

than stocks, earning about a 4 to 5 percent return on average over time.15 U.S. govern-

ment securities such as T-Bills or Treasury bonds have the lowest returnsabout 1 to 2



percent on average in the post-war periodbut offer unparalleled security as an option

for investors unwilling to stomach any risk.16 And as well see in a section below, even

despite the recent nancial crisis and the big associated market losses, returns on invest-

ments in these markets still come out ahead of what Social Security promises.

Markets go up and down, of course, and there is undoubtedly risk in investing. Nothing

is guaranteed. But if historical trends continue, compounding the much higher returns

on stocks and bonds over a lifetime adds up to an enormous difference when compared

to the much lower returns offered by Social Securitys pay-as-you-go, tax and redistri-bution system. To illustrate, lets examine the case of a typical two-earner household,

a husband and wife where both earn the average income for full-time male and female

workers. Lets be more specic and say that they each entered the workforce in 1985 at

age 22 and they have two children.

Now suppose they could save and invest the payroll taxes that would otherwise go into

Social Security in their own personal investment account over their entire lives. Sup-

pose funds are set aside each year to buy private life and disability insurance that would

pay at least the same survivors and disability benets as Social Security promises. The

rest of their funds are saved and invested each year in a diversied portfolio of stocksand bonds and earn a conservative real return on average of 5 percent per year. What

would the results be?

This average-income family would reach retirement with a personal account fund of

$1,223,602 in todays dollars, after adjusting for ination. Out of the continuing invest-

ment returns alone that fund would be able to pay about twice what Social Security

promises to pay them under current law, while still allowing them to leave the entire $1.2

million fund to their children. Or they could use the fund to buy themselves an annuity

that would pay them over four times what Social Security currently promises (let alone

what it will actually be able to pay).17

Keep in mind that Social Securitys nances are quickly deteriorating. If the govern-

ment raises payroll taxes, cuts benets, or does some combination of both in order to

x these problems, then the effective rate of return under Social Security will fall even

further for all workers across the boardincreasing the gap between Social Securitys

low returns and the much higher returns workers can receive with the freedom to invest

their money as they see t in the market.

Personal Accounts for Social Security

Thankfully, there is a better way. Workers could be empowered with a choice: they

could stay with the tax-and-benet system of Social Security as it is currently struc-

tured, or they could take some or all of the payroll tax contributions that they and their

employer currently pay and instead save and invest them through apersonal savings

account. In the latter instance, whatever portion of their payroll taxes that they choose

to put aside into their personal savings account would come back to them in retirement

and substitute for the corresponding portion of their Social Security benets. Plus they

would also receive the accumulated interest earnings from their accounts investments.

Such accounts dont just reduce the growth of government spending; they also shift vast

amounts from a public sector tax and spend plan to private sector savings and invest-

ment.

Compounding thehigher returns on

stocks and bonds

over a lifetime

makes a big differ-

ence when com-

pared to the lower

returns offered by

Social Securitys

current system.



Over time, personal savings accounts could be expanded to take over the nancing for

all of the benets that are currently nanced by Social Security payroll taxes. With

workers nancing their own retirement instead of relying upon government benets, and

with workers taking advantage of the higher investment returns found in private markets

instead of the much lower returns offered in Social Securitys current form, this would

dramatically reduce Social Securitys enormous budgetary burden. This would amount

to the largest reduction in government spending in world history.

Eventually the entire employee and employer portions of the payroll tax (a combined

12-plus percent tax on the rst $110,100 in wages) could be fully replaced with personal

savings and investment that are directly owned by each worker and his or her family.

This would amount to the largest reduction in taxes in world history.

Many of the proposals for adopting Social Security personal savings accounts are ac-

tuarially sound and would fully eliminate the programs current unfunded liability of

nearly $18 trillion. This would amount to the largest reduction in effective government

debt in world history.

There are additional advantages that go beyond just dollars and cents. Workers savings

are theirs to keep and can be used to nance their own retirement as they choose they

truly own and controlthe funds in the personal savings account, unlike with Social Secu-

rity benets. Workers can be free to choose their own retirement age, rather than let-

ting the government dictate it for them. Working people across the board, at all income

levels, could build savings and wealth through the opportunity to own substantial stakes

in businesses and industries around the world doing far more to promote equality of

wealth in America than current proposals based on redistribution and punishing the suc-

cessful.18 And instead of disappearing into government accounting books, a workers

lifetime of hard-earned savings can be transferred to their loved ones at death.

Of course, there are risks. Investments in stocks and bonds have no guarantee and can

incur losses. But a central pillar of all personal account proposals is an opt-in require-

ment: workers are individually free to accept or reject the opportunity to take risks and

invest their savings in capital markets. If they think it is too dangerous, they dont have

to get involved and can stay with the current plan for Social Security. Many proposals

also feature a guarantee that personal accounts will pay at least as much as Social Secu-

rity in its current form, even if workers face large, unexpected investment losses. The

key point is that personal savings accountsgive workers the freedom to choose how their

payroll tax contributions are saved and spent, and this freedom must be at the core of

any effort to x Social Securitys structural aws.

Social Securitys Current Structure Social Security with Personal Savings Accounts

Workers see payroll taxes take a big chunk out of everypaycheck. Those funds are then funneled through

Washington to pay for current retirees benefits. It s a

pay-as-you-go system that for decades has counted on

fewer and fewer workers to pay for each retiree.

Workers have the choice to put all (or a portion) of thosesame payroll taxes into a savings account that they ownand control, allowing them to accumulate wealth overthe years and fund their own retirement.



Proven to Work: Personal Accounts in Chile and the Galveston, Texas Plan

One successful model for personal savings accounts was adopted in Chile over 30 years

ago.19 Before the reforms, the combined payroll taxes nancing their Social Security

system were 26 percent or higher, yet their system was still running huge decits. More-

over, the promised benets represented a poor deal for Chilean workers on these huge

tax payments.

On May 1, 1981, Chile adopted revolutionary reforms to its Social Security system.Workers now had the choice to stay in the old Social Security system or participate in a

new personal savings accounts system. Workers who opted-in to the new system pay, in

place of the old payroll taxes, 10 percent of their wages each month into a personal ac-

count directly owned and personally controlled by the worker. Workers also contribute

an additional 2.9 percent of wages for the purchase of group life and disability insur-

ance, which replaces the old systems pre-retirement survivors and disability benets.

With their accumulated personal savings account funds, Chilean workers can choose to

invest in 20 alternative investment funds that are approved and regulated by the govern-

ment and managed by private sector investment management companies (Administra-dora de Fondos de Pensiones). These companies choose the particular mix of stocks,

bonds, and other investments for the funds, creating a highly diversied portfolio. The

fund options are subject to government regulation that excludes excessively-risky in-

vestments and mandates a minimum return to workers. Workers can change investment

companies on short notice, creating competition among the investment rms to provide

higher returns and better service to their customers.

With the investment companies working to manage fund portfolios, theres no need for

the workers to be stock market experts to participate. And the Chilean government backs

up the personal accounts with a guarantee that all workers will get at least a minimum

benet in retirement equal to about 40 percent of their average pre-retirement wages(about what the U.S. Social Security system pays to average-income workers today).

The personal accounts have been a huge success. By 2001, just twenty years after the

reforms were adopted, a full 94 percent of Chilean workers were participating in the new

system, probably because the personal accounts paid retirement benets that were, on

average, 50 to 100 percent higher than the old systems benets. By 2004, the real rate

of return on personal account investments averaged a shocking 10 percent, more than

double what reform advocates had expected. And as advocate Jose Pinera explained, the

reforms helped shape a major cultural shift in the still-developing country:

For Chileans, the retirement accounts represent real property rights. Since they have apersonal stake in the economy, workers cheer the stock markets surges rather than resenting

them, and know that bad economic policies will harm retirement benets. When workers

feel that they themselves own a part of their countrys wealth, they become participants and

supporters of a free market and a free society.20

Within a few years after the reform was adopted, annual economic growth exploded in

Chile, with the economy growing twice as fast in the twenty years following the reform

than it did in the twenty years prior to the reform. With a major government spend-

ing burden removed, Chiles publicly-held debt has been held down to just 9.2 percent

of GDP (compared to over 63 percent of GDP here in America), one of the lowest in

When workers feelthat they them-

selves own a part

of their countrys

wealth, they be-

come participants

and supporters of

a free market and

a free society.



the world. And despite a devastating earthquake that rocked the country in early 2010,

Chile is still on track to be the rst of the Latin American countries to join the worlds

most advanced economies those with per capita income of more than $25,000 per year

by the end of this decade.21

199

143

84

6355

40

2316

9 9

0

20

40

60

80

100

120

140

160

180

200

Japan Greece Canada U.S. Brazil Sweden S. Kor. China Chile Russia

Source: CIA World Factbook

Public Debt (% of GDP), 2010

We dont have to go all over the world to nd examples for personal savings accounts.

We have a highly successful example right here in America. In 1981, government work-

ers for Galveston County, Texas voted to opt out of Social Security and replace it with a

new plan something federal law allowed state and local government workers to do at

the time. Nearby Matagorda and Brazoria counties voted to join them in 1982, starting

a wave of state and local government workers seeking a better deal than what Social Se-

curity could offer. Not wanting to lose more and more contributors to Social Securitys

payroll tax pool, the federal government repealed this opt-out provision in 1983.

Under the Galveston Plan close to 10 percent of the workers salary is contributed to

a dened contribution account each year, split between employee and employer, much

like a 401(k) personal retirement account that many workers have in the private sector.

Those contributions are invested conservatively in annuities with a guaranteed minimum

rate of return (at least 4 percent), rather than investing in stocks and bonds. As of 2005,

however, annual rates of return have been much higher, about 6.5 percent on average

over the life of the program. Just as in Chile, workers have real savings and investment

in this plan, and the result has been much higher benets than what Social Security

promises, let alone what it will actually be able to pay.22

Personal Accounts and the Financial Crisis

As mentioned above, investing in capital markets entails risk, and this lesson is clearer

than ever in the wake of the nancial crisis. Opponents of personal accounts frequently

point to losses like these, losses that investors sometimes face in the ups and downs of

the market, as evidence that giving workers the freedom to invest for retirement is just

too risky. They say the nancial crisis proved that personal accounts are a bad idea.

Well, didnt it?



Lets look at the evidence. In October 2010, I joined with William Shipman, a former

investment manager with State Street Global Advisors, to study the impact of the nan-

cial crisis on lifetime savings and investment.23 We examined the case of a hypothetical

average-income couple retiring at the end of 2009, just after the nancial crisis had done

all of its damage to nancial markets and before those markets started to recover.

The couple was given the freedom to choose personal savings accounts (instead of

Social Security) when they entered the workforce in 1965 at age 21. Paying what they

and their employers would otherwise pay into Social Security into the personal savingsaccount instead, they took the riskiest possible path: investing their entire portfolios in

the stock market for their full 45-year working career.

The couples retirement dreams must have been wiped out by the nancial crisis, right?

Wrong. The couple would have reached retirement at the end of 2009 with accumulated

account funds of $855,175 nearly millionaires. Indeed, they had been millionaires, but

big stock-market losses during the nancial crisis trimmed 37 percent from their account

funds the year before they retired.

This can be considered effectively the worst case scenario. Yet their personal savingsaccount would still be sufcient to pay them about 75 percent more than what Social

Security had promised to them. Even though the couple retired immediately after the

worst ten-year stock market performance in American history, and even though they had

pursued the riskiest investment strategy, they still came out ahead of the current system.

Even despite the nancial crisis every state and local government pension fund, every

corporate pension fund, the federal employee retirement plans, and the successful Social

Security reform in Chile all continue to be based on capital investment to nance ex-

pected retirement benets, not a tax-and-redistribution plan. Savings and market invest-

ment continue to be universally recognized as the most efcient and the only responsible

means of providing for future retirement benets.

And dont forget, under the personal savings accounts proposals weve seen workers

have a choice: if they arent comfortable with taking on market risk they can choose a

less-risky investment strategy or even invest in risk-free government bonds, or they

can choose to not invest at all and stay in the Social Security system as it stands. The

point is that its up to them. Workers, not the government, get to choose whats best for

them.

The Ryan-Sununu Plan in 2005

Here in America, personal savings accounts for Social Security are not a new idea; in

fact, lawmakers have made big pushes for the accounts within the last decade. The con-

versation rst hit the national stage in December 2001 when President George W. Bushs

Commission to Strengthen Social Security published a report advocating such personal

accounts.24

Then in 2004 Congressman Paul Ryan (R-WI) and Senator John Sununu (R-NH) intro-

duced comprehensive legislation to x Social Securitys long-run nancial problems by

providing for a personal savings account option for all American workers. Under the

bill, no changes would be made for those aged 55 and up those already retired or near

Even though thecouple retired

immediately after

the worst ten-

year stock market

performance in

American history,

they still came out

well ahead of the

current system.



retirement would continue to receive all promised Social Security benets. Workers un-

der 55 could opt in to a personal savings account system, making contributions to their

savings account instead of paying Social Security payroll taxes. With those savings,

workers could choose from a number of investment fund options managed by private

investment rms, each with different mixes of stocks and bonds or other investments.

At retirement, workers would purchase an annuity that provides a monthly stream of

benet payments at least as generous as the benets they would have received under the

current Social Security system. But the left over savings are the workers to keep anduse as they see t in retirement, and can be left to their loved ones when they pass away.

Like in Chile, the federal government would guarantee that retirees with personal sav-

ings accounts would receive benets at least as generous as what they would have

received under the current Social Security system, preserving the safety-net feature

of the program for seniors. Also like in Chile, the federal government would still pay

the portion of Social Security benets based on the past taxes that workers have already

paid into the current Social Security system, so nobody would lose benets that they

have already paid for.

Social Securitys Chief Actuary reported that the reforms would return Social Security toscal solvency and keep it there for over 75 years into the future and beyond; the per-

sonal savings accounts would be so benecial for workers that eventually almost every-

one would opt in; payroll taxes would drop from their current combined 12.4 percent

rate to just 4.2 percent, enough to nance all remaining survivors and disability benets;

and with standard, long-run market returns on their savings, after just 15 years workers

will have accumulated an ination-adjusted $7.8 trillion of savings, enough to provide

substantially more generous benets for retirees than Social Security now promises.25

This is a clear contrast from the benet cuts, tax increases, and inated government bor-

rowing that we will see under Social Security in its current form.

0

2

4

6

8

10

12

14

16

18

The "cost ratio" for

Social Security can

be roughly

described as the

combined payroll

tax rate that

workers would need

to pay in order to

fully cover the cost

of benefits andadministration of

the program.

Cost Ratio (Percent of Taxable Wages)

Current Social Security Ryan-Sununu Plan



Financing the Transition

Because Social Security currently operates on a pay-as-you-go basis, if current workers

start putting money into savings instead of paying payroll taxes, funds will have to come

from somewhere else to pay for current retirees benets. The transition nancing gap is

signicant: potentially over a trillion dollars.

There is good news, however. First, the need for the additional transition funds phases

out over time as more and more participate in the personal accounts, and eventually thenew system actually generates surpluses relative to the current Social Security system.

In other words, the cost is temporary whereas the benets (shifting from an unsustain-

able tax and redistribution, pay-as-you-go system to a fully-funded retirement savings

system) are lasting. This is true for eliminating the unfunded liabilities of any under-

funded pension plan.

Second, the nancing gap can be paid for entirely by cutting wasteful government

spending. Americans for Prosperity has already identied over $5 trillion in sensible

cuts that can be achieved immediately,26 and there are plenty of good proposals to trim

the federal governments bloated budget. Further entitlement reforms would achieve ad-

ditional savings that can be used to nance the transition. Cutting spending now to shore

up Social Securitys nances for the future is an opportunity worth pursuing.

Conclusion

Americans have a choice. Social Security as it currently stands promises a future of tax

increases, benet cuts on the backs of seniors and future retirees, or some combination

of the two all of which makes an already bad deal for workers even worse.

Social Security personal savings accounts transform the current tax-and-redistribution

model into a personal savings and wealth engine for workers and their families, all while

saving Social Security from scal ruin and preserving its safety net for seniors. As thisprogram takes hold, eventually the payroll tax that is currently paid by workers and their

employers could be phased out all together. As the personal accounts funnel new sav-

ings and investment into the economys capital markets, workers can build wealth while

additional capital investment can translate into higher productivity and new jobs in the

American economy.

The fatal fallacy persists that it would be politically easier easier to cut benets or raise

taxes than to enact major structural reforms like personal accounts. Instead, a mighty

grassroots movement supporting Social Security freedom and prosperity can make an

innovation like personal savings accounts a reality for Americas working people today.

The fallacy persiststhat it would be

politically easier

to cut benets or

raise taxes than to

enact major struc-

tural reforms like

personal accounts.



Endnotes:

1. Social Security adminiStration,Full Retirement Age (online at http://www.ssa.gov/retire2/re-

tirechart.htm) (accessed January 25, 2012).

2. officeof managementand Budget,Historical Tables of the United States Budget, Table 3.2:

Outlays by Function and Subfunction (February 2012) (online at http://www.whitehouse.gov/omb/budget/

Historicals).

3.Social Security adminiStration

, Social Security and Medicare Tax Rates (online at http://www.ssa.gov/oact/ProgData/taxRates.html) (accessed January 24, 2012); Social Security adminiStration, Contri-

bution and Benet Base (online at http://www.ssa.gov/oact/COLA/cbb.html) (accessed January 24, 2012).

In recent months Congress has had heated debates over extending the temporary payroll tax cut that was

rst implemented in 2011, because some believe the tax break will help stimulate the still-ailing economy.

The employee-portion is scheduled to revert back to 6.2 percent at the end of 2012.

4. Andrew G. Biggs,From Ponzi to Perry: The Truth About Social Security, american enterpriSe

inStitute, The American Online Magazine (September 14, 2011) (online at http://www.american.com/ar-

chive/2011/september/from-ponzi-to-perry-the-truth-about-social-security).

5. oaSdi Boardof truSteeS, The 2011 Annual Report of the Board of Trustees (May 13, 2011) (on-

line at http://www.ssa.gov/oact/tr/2011/tr2011.pdf) (hereinafter Trustees Report).

6. the White houSe,Fiscal Year 2000 Budget of the United States Government: Analytical Perspec-

tives, at page 337 (February 1999) (online at http://www.gpoaccess.gov/usbudget/fy00/pdf/spec.pdf).

7. Fleming v. Nester, 363 U.S. 603 (1960).

8. Trustees Report,supra note 5, at page 3, 5, and 14.

9. Elizabeth Arias,National Vital Statistics Reports: United States Life Tables, 2007, centerSfor

diSeaSe controland prevention, diviSionof vital StatiSticS, at page 48 (September 28, 2011) (online a

http://www.cdc.gov/nchs/data/nvsr/nvsr59/nvsr59_09.pdf).

10. Bureauof laBorStatiSticS,Labor Force Participation Rate from the Current Population Survey

(through December 2011) (online at http://data.bls.gov/timeseries/LNS11300000).

11. Social Security adminiStration, Table IV.B2 Covered Workers and Beneciaries, Calendar

Years 1945-2086(May 13, 2011) (online at http://www.ssa.gov/oact/tr/2011/lr4b2.html).

12. Orlo Nichols et. al,Internal Real Rates of Return Under the OASDI Program for Hypothetical

Workers, Social Security adminiStration, Actuarial Note No. 2008.5 (April 2009) (online at http://www.

ssa.gov/oact/NOTES/ran5/an2008-5.pdf ) (Table 3 - Payable Benets Scenario).

13. See, e.g., Peter Ferrara, Social Security is Still a Hopelessly Bad Deal for Todays Workers , the

cato inStitute, Project on Social Security Privatization, SSP No. 18 (November 1999) (online at http://

www.cato.org/pubs/ssps/ssp18.pdf).

14. Jeremy Siegel, Stocks for the Long Run, 4th Edition, at page 13 (New York: McGraw-Hill, 2008)

(hereinafter Stocks for the Long Run).

15. Edgar K. Browning, The Anatomy of Social Security and Medicare, The independent revieW, Vol.

13, No. 1, at page 12 (Summer 2008) (online at http://www.independent.org/pdf/tir/tir_13_01_1_brown-

ing.pdf); BarclayS capital, 2011 Equity Gilt Study (online at http://www.barcap.com/egs/) (accessed

January 27, 2012).

16. Stocks for the Long Run,supra note 14, at page 15.

17. Peter Ferrara,Americas Ticking Bankruptcy Bomb (New York: Harper Collins, 2011); Peter Fer-

rara and Michael Tanner,A New Deal for Social Security (Washington, DC: Cato Institute, 1998).


13/13

18. Martin Feldstein, Social Security and the Distribution of Wealth, Journalofthe american StatiS-

tical aSSociation, Vol. 71, No. 356 (December 1976) (online at http://www.jstor.org/pss/2286842).

19. Here and throughout this section on Chile,see Jose Pinera,Empowering Workers: The Privatiza-

tion of Social Security in Chile (1996) (online at http://www.transformamericas.org/?p=128); Jose Pinera,

Toward a World of Worker-Capitalists (April 2001) (online at http://www.transformamericas.org/?p=150);

Jose Pinera,Retiring in Chile (December 2004) (online at http://www.transformamericas.org/?p=124).

20. Jose Pinera,Retiring in Chile (December 2004) (online at http://www.transformamericas.

org/?p=124).

21. the World Bank,Data: Chile (online at http://data.worldbank.org/country/chile) (accessed

January 31, 2012); organizationforeconomic co-operationand development,StatExtracts: Central

Government Debt(online at http://stats.oecd.org/Index.aspx?DataSetCode=GOV_DEBT) (accessed Janu-

ary 31, 2012); central intelligence agency, World Factbook Country Comparison: Public Debt(2010)

(online at https://www.cia.gov/library/publications/the-world-factbook/rankorder/2186rank.html); Andres

Oppenheimer, Chilean Model is Shaken, But Still Very Much Alive , the miami herald(August 28, 2011)

(online at http://www.miamiherald.com/2011/08/27/2378413/chilean-model-is-shaken-but-very.html).

22. Ray Holbrook and Alcestis Cooky Oberg, Galveston County: A Model for Social Security

Reform,national centerforpolicy analySiS (April 26, 2005) (online at http://www.ncpa.org/pub/

ba514); Merrill Mathews,No Risky Scheme: Retirement Savings Accounts that are Personal and Safe,

inStituteforpolicy innovation, Policy Report No. 163 (January 2002) (online at http://www.ipi.org/IPI%5CIPIPublications.nsf/PublicationLookupFullTextPDF/B0037202A407D6E886256B490008CA89/$

File/PR-SSPrivatization.pdf?OpenElement); Theresa M. Wilson, The Galveston Plan and Social Security:

A Comparative Analysis of Two Systems, Social Security adminiStration, Social Security Bulletin, Vol.

62, No. 1 (1999) (online at http://www.ssa.gov/policy/docs/ssb/v62n1/v62n1p47.pdf); Testimony of Don

Kibbedeaux before the Senate Committee on Finance, Subcommittee on Securities (April 30, 1996).

23. William Shipman and Peter Ferrara,Private Social Security Accounts: Still a Good Idea, Wall

Street Journal (October 27, 2010) (online at http://www.cato.org/pub_display.php?pub_id=12514).

24. preSidentS commiSSionto Strengthen Social Security, Strengthening Social Security and Creat-

ing Personal Wealth for All Americans (December 2001) (online at http://www.ssa.gov/history/reports/

pcsss/Final_report.pdf).

25. Stephen C. Goss, Chief Actuary, Social Security Administration,Estimated Financial Effects

of the Social Security Personal Savings and Prosperity Act of 2004(July 19, 2004) (online at http://

www.ssa.gov/oact/solvency/PRyan_20040719.html). See also congreSSional Budget office,Analy-

sis of the Roadmap for Americas Future Act of 2010 (January 27, 2010) (online at http://www.cbo.gov/

ftpdocs/108xx/doc10851/01-27-Ryan-Roadmap-Letter.pdf).

26. americanSforproSperity, Cut Spending Now: Recommendations for the Joint Select Committee

on Decit Reduction (October 2011) (online at http://www.americansforprosperity.org/les/Policy_Pa-

per_JSC_Recommendations.pdf).

Americans for Prosperity Foundation (AFPF) is a nationwide organization of citizen-leaders commit-

ted to advancing every individuals right to economic freedom and opportunity. AFPF believes reduc-

ing the size and intrusiveness of government is the best way to promote individual productivity and

prosperity for all Americans. AFPF educates and engages citizens to support restraining state and fed-

eral government growth and returning government to its constitutional limits. AFPF is more than 1.9

million activists strong, with activists in all 50 states. AFPF has 34 state chapters and afliates. More

than 90, 000 Americans in all 50 states have made a nancial contribution to AFP or AFP Foundation.

For more information, visit http://www.americansforprosperityfoundation.com/

2012 Americans for Prosperity Foundation. All Rights Reserved.

Ferrara - Social Security Reform

Documents

Transcript of Ferrara - Social Security Reform