Modernize
and Reform Social Security
En Español
"We're
going to keep the promise of Social Security and keep the government
from raiding the Social Security surplus. And to safeguard the system
against long-term threats, I will form a Presidential commission
to reform Social Security, and place it on firm financial ground."
President George W. Bush
For
65 years, Social Security has provided retirement security for
tens of millions of Americans. Four generations of Americans have
relied on the Government to keep the promises it made to them
during their working years. As demographics change and costs increase,
the challenge we face is ensuring that the Social Security system
is strengthened for tomorrow's retirees.
The
Need for Reform
Social
Security's spending path is unsustainable in the long run, driven
largely by demographic trends.
First,
longer life spans mean more benefit payments. In 1940, during
the early years of the program, life expectancy at age 65 was
an additional 12 years for men and 13 years for women. By 2075,
the remaining life expectancy at age 65 is projected to be 20
years for men and 23 years for women. As a result, people are
spending a growing proportion of their lives in retirement. While
longer life spans are clearly desirable, they also mean additional
years of benefit payments, and a dramatic long-term increase in
Government obligations.
In
addition, a long-term decline in fertility rates means there will
be fewer workers available to support each retiree once the baby
boom generation starts to retire. As a result of declining birth
rates and increasing life expectancy, the ratio of workers to
Social Security beneficiaries is expected to shrink from 5.1 in
1960 to 3.4 today to 2.1 in 2030. These demographic trends will
strain our ability to make benefit payments at current payroll
tax rates.
The
Social Security system faces a long-term unfunded liability of
$8.7 trillion. In addition, the structure of Social Security leads
to substantial generational inequities in average rate of return.
(See Chart 41.)
Old
Solutions and a New Approach
Without
new thinking on Social Security reform, two old choices will soon
present themselves. We can further reduce future retirees' returns
from Social Security through benefit cuts or through tax increases.
Or we can do nothinginaction would simply mean leaving this problem
for our children and grandchildren instead of addressing it for
them now.
There
is a better way to address both the long-term financial crisis
and the generational inequities. Allowing individuals to keep
some of their payroll taxes in personal retirement accounts to
provide for their own retirement security can reduce the need
for a rapidly growing Government outlay by creating opportunities
for younger workers to enjoy the fruits of higher rates of return
in private equity markets.
Principles
for Reform
Modernization
must not change existing benefits for current retirees or near-retirees,
and it must preserve the disability and survivors' components.
The promises made to current retirees must be kept.
The
Social Security surplus must be preserved only for Social Security.
For 30 years, Social Security surpluses have been used to mask
spending increases in programs unrelated to Social Security. Surpluses
in the Social Security Trust Funds will total $2.6 trillion over
the next 10 years. These surpluses will be saved for Social Security
reform and will be used to reduce debt held by the public until
Social Security reform is enacted.
Social
Security payroll taxes must not be increased, as they have been
20 times since the program began in 1937.
The
Government itself must not invest Social Security funds in the
private economy.
Successful
Social Security reform, which addresses both the long-term unfunded
liability and the generational inequities, must be built upon
a core of individually controlled, voluntary personal retirement
accounts that will augment the Social Security safety net.
The
Benefits of Personal Retirement Accounts
Personal
retirement accounts, which would be voluntary, would enable individuals
to build financial wealth and security in a way that the current
Social Security system does not. Personal accounts invested in safe
private financial markets will earn higher rates of return than
the traditional system and help workers enhance their personal savings
and their freedom to retire. Ownership of a real financial asset
without the political risk of future changes would mean more security
for working Americans to build their own retirement assets, and
to pass those assets on to their children.
A balanced
portfolio of stocks and bonds can, in the long run, yield almost
a 5.5 percent real rate of return. Even a portfolio of inflation-adjusted
Government bonds yields a 3.0 percent real rate of return. Both
are significantly better investments than those implicit in the
current Social Security system, which, for many younger workers,
could ultimately result in a negative rate of return.
This
higher rate of return, through individually controlled investments
in private debt and equity markets, is the key to the success of
personal accounts. A two to four percentage point differential,
compounded over time, means greater retirement security than under
current law.
The
long-term fiscal challenge facing the Social Security system, and
the generational inequities inherent in that system, drive the need
for reform. Reform is significantly easier to implement if done
far in advance, so that individuals and families have time to adjust
their retirement plans, and so that changes can be phased in slowly
over time. Reform based on personal accounts presents a tremendous
new opportunity to enable individuals to build financial wealth
and security, while reducing the twin problems of fiscal imbalance
and generational inequity.
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