All Commentary
Sunday, September 1, 1996

Restoring Hope in America: The Social Security Solution and Let’s Get Rid of Social Security: How Americans Can Take Charge of Their Own Future

These Books' Promised "Win-Win" Solutions Are Untenable

Dr. Attarian is a freelance writer in Ann Arbor, Michigan.

Most Americans now realize that when the huge Baby Boom generation retires, supported by a slower-growing Baby Bust taxpaying workforce, Social Security will go broke. Proposals are emerging to avert disaster, with most, like those here reviewed, entailing some privatization.

National Development Council chairman Sam Beard proposes to create “100 million millionaires” through “the magic of compound interest.” He would retain Social Security’s mandatory tax-based character, but bifurcate the payroll tax. “Tier 1” would contain “most of your Social Security taxes,” and pay benefits to current retirees. “Tier 2” would be set aside in personal investment and retirement accounts. Americans earning $10,000 or more will pay $1,240 per year into Social Security—and can become millionaires. Investing $30 weekly from payroll taxes, at 8 percent compound interest, will in 45 years amass $1,291,433 for retirement. Problem solved.

Or is it? Beard’s plan is flawed at the core by double-counting these taxes. Putting $30 weekly into Tier 2 comes to $1,560—all the taxes on $12,580. Indeed, Beard repeatedly writes as if all taxes would go into Tier 2. But to pay current retirees present-law benefits, which Beard, kowtowing to the American Association of Retired Persons myth of Social Security as a “sacred contract,” insists on doing, “most of your Social Security taxes” would indeed have to remain in Tier 1, and hence be unavailable for investment.

So much for payroll taxes and “the magic of compound interest” creating 100 million millionaires—who are only nominal anyway. Adjusted for inflation, the magician’s rabbit turns mangy; $1,291,433 shrinks, Beard admits, to $229,935. Then, too, he wants mandatory participation through taxes, which he deems “exciting.” Anybody excited about being coerced?

More positively, Beard furnishes handy descriptions of Chile’s privatized retirement insurance and the Teachers Insurance and Annuity Association-College Retirement Equities Fund (TIAA-CREF) plan, and makes a good case for turning defined- benefit pensions into immediately vested, portable, defined-contribution plans a la TIAA-CREF.

Texas businessman Edwin J. Myers has a similar plan. His chatty, digressive, and repetitive book narrates how Social Security metastasized from the modest supplemental pension that Franklin Roosevelt originally intended into a vast demographically doomed entitlement, which the elderly now look to for primary retirement income. He also explains how private defined-benefit pension plans developed; the widespread underfunding of pension plans; the reneging on pension promises following takeovers and buyouts; the Pension Benefit Guaranty Corporation; and federal and state government pension plans. While students of Social Security and pensions will learn little from Myers’s exposition, its accessible level and informal style make it useful for ordinary Americans.

Drawing on the successful pension plan set up for county employees of Galveston, Texas, when they opted out of Social Security, Myers proposes Individual Security Retirement Accounts (ISRAs), financed with the worker’s share of payroll taxes. Pooled into a huge mutual fund, these accounts would, through compound interest, generate huge (nominal-dollar) nest eggs yielding far better payouts than Social Security. All workers under 37 years old would participate. Workers aged 37-45 could either opt for an ISRA or stay in Social Security.

To finance current Social Security, Myers would use the employer’s share of the payroll tax, plus the payroll taxes of workers aged 37-45 who choose to remain in Social Security. To balance outlays and revenues, Myers proposes either means testing current retirees’ benefits or using the interest payments to the trust funds to pay benefits.

Unfortunately, Myers, like Beard, ignores the implications of his proposals. If ISRAs so greatly outperform Social Security, leaving Social Security will be 37-45-year-old workers’ rational choice—which would create a huge revenue shortfall. This in turn would make payment of current retiree benefits problematic. He evidently assumes that these workers will be ignorant or fatuous enough to stay in a system offering them far worse returns than they could get elsewhere. Like Beard, he overpromises and leans on weak reeds.

He also shares Beard’s inattentive boosterism. Shortly after proposing means testing whereby current retirees with retirement incomes of $60,000-$69,000 would lose 40 percent of benefits, and those making over $99,999 would lose 80 percent, Myers asserts that “no one, from the young to the elderly, will be penalized. . . . No one will lose a cent.” How’s that again?

These books helpfully highlight the need for Social Security reform (its abolition would be best), but their untenable promised “win-win” solutions are very dangerous. They appeal mightily to Americans’ weakness for wishful thinking and painless solutions. Worth a look? Yes—but remember the saying, “If something sounds too good to be true, it probably is.”