Cato Institute Proposes Solution to Problem
By Daniel Remin
WASHINGTON — At a Social Security forum sponsored by the Cato Institute Wednesday, speakers proposed changing the current “pay-as-you-go” system to a fund-based system that would privatize Social Security, allow more people to collect benefits and, they said, make the system more equitable for all Americans.
“What we need to do is say how can we create the best retirement system there is for all Americans,” said Michael Tanner, director of Cato’s Project on Social Security Choice and director of health and welfare studies at Cato, a libertarian think tank, and one of the two speakers Wednesday. “This is going to be a complex issue that is going to require a lot of debate in Congress.”
Tanner and Andrew Biggs, a Social Security analyst and assistant director of Cato’s Project on Social Security Choice, cited what they called problems with the current system. They said the program would begin to run a deficit within the next 15 years. By 2041, “Social Security will be legally and financially unable to pay the full promised benefits,” Tanner said. “At that point, by law, Social Security must reduce the benefits it’s paying by 25 percent or more.”
Tanner said he believes that some type of change is required.
“What’s really important is to understand that there is one option that is not really an option. And that is to do nothing,” he said. “Every two years we wait, we will be costing about $325 billion more in order to make the transition to an individual account system.”
Wednesday’s event was the first in a series of several meetings Cato is sponsoring on Social Security.
Sen. John Sununu, R-N.H., said he agrees that reform is necessary. “We need to tackle Social Security head on and get beyond the rhetoric and partisan politics,” Sununu said in a statement. “We cannot leave this challenge to future generations, future Congresses. Our children and grandchildren deserve no less.”
Rep. Charlie Bass, R-N.H., said he plans to study proposals to allow people to invest in individual accounts. “Because Social Security faces serious challenges and will not survive without considerable reforms, I am examining proposals to allow individuals the option of investing a portion of their Social Security contribution into personal retirement savings accounts,” Bass said in a statement.
Sen. Judd Gregg, R-N.H., said he agrees that having people invest in individual accounts is a significant part of reform.
“Many solutions that have been proposed include allowing workers to contribute a small portion of their own earnings in individually owned savings accounts,” Gregg said in a statement. “I believe this is an important aspect of any meaningful Social Security reform if the transition costs can be funded without posing a significant hardship on the current system.”
Not everyone in the New Hampshire congressional delegation agreed with the idea of privatizing Social Security. “I said (during the campaign) I was not in favor of privatizing Social Security, raising the retirement age, reducing benefits,” Rep. Jeb Bradley, R-N.H., said in an interview Wednesday. “I do think we need to have a long-term discussion in this country as to how we’re going to protect and preserve Social Security in the future.”
Under today’s pay-as-you-go system, the money taken out of a worker’s paycheck is not saved to pay that person’s retirement benefits later but is used to pay benefits to today’s retirees, Biggs said.
“Social Security isn’t a savings and investment program,” Biggs said. “It’s essentially a transfer program.”
According to Biggs, there are some downsides to this system, including its dependence on a favorable ratio of workers to retirees. However, given today’s demographics, the system might not be able to sustain itself, he said.
“People are having smaller families,” Biggs said. “Lower fertilities and lower birth rates mean fewer new workers entering the work force, fewer new workers paying into the system. At the same time, seniors are living longer. That means a larger population collecting out of the system.”
According to Cato, there are 3.4 workers for each retiree today, a ratio the institute estimates will drop to 2.1 workers per retiree by 2030.
Biggs said that one option he’s heard suggested is borrowing money. But he said that would not last. “You can’t borrow forever,” he said. “It’s like a credit card. Your balance gets bigger and bigger and bigger. Eventually, there’s a day of reckoning, and you have to pay it off.”
Besides these problems, Tanner and Biggs said, the current Social Security system is unfair to African Americans, women, divorcees and younger Americans.
During the discussion, Biggs and Tanner proposed a solution that involves changing from the current system to a funded system that would invest today’s workers’ contributions to pay their future benefits, Biggs said.
One major advantage of the funded system, Biggs said, is that it would earn a “substantially higher rate of return.”
“The upshot of that is that a funded system can pay the same level of benefits at around one-quarter of the cost as a pay-as-you-go system,” Biggs said.
Under the Cato Institute’s proposal, funding could come from the government or from individuals’ personal accounts. “The economics are the same,” Biggs said. “People across the spectrum agree we should have a funded system.”
(Daniel Remin is an intern with the Boston University Washington News Service.)
Published in The Manchester Union Leader, in New Hampshire.
