FOCUS: In the End, It’s About Ownership

As the debate over Social Security reform has unfolded over the past few months, there has been much discussion about Social Security’s coming financial crisis, and with good cause.

Social Security will begin running a deficit in 12 years—that is, it will begin to spend more money on benefits that it brings in through taxes. At that point, in order to continue to pay promised benefits, it will have to draw on the Social Security Trust Fund. Opponents of reform, make much of this Trust Fund, suggesting that it guarantees Social Security’s solvency until 2041, or even 2052 according to some projections. Even if true, that should offer cold comfort to Harvard students who would still be several years from retirement and facing a system unable to pay them what it has promised.

But the situation is even worse than that, because we cannot rely on the Trust Fund to preserve Social Security. After all, it was former President Bill Clinton—not President Bush—who pointed out in his budget in 2000 that “These Trust Fund balances are available to finance future benefit payments…but only in a bookkeeping sense…They do not consist of real economic assets that can be drawn down in the future to fund benefits. Instead, they are claims on the Treasury that, when redeemed, will have to be financed by raising taxes, borrowing from the public, or reducing benefits or other expenditures. The existence of Trust Fund balances, therefore, does not by itself have any impact on the government’s ability to pay benefits.”

Thus, in less than 12 years, the federal government will have to begin finding billions of dollars to continue paying benefits. Overall, Social Security’s unfunded liabilities total nearly $12 trillion. And, the longer we wait, the worse it gets. Estimates suggest that the cost of each additional year that we wait to reform Social Security costs $600 billion more. That means the government will be coming back to you and asking you to pay more in payroll taxes, as much as 50 percent more by some estimates.

However, all the focus on the Social Security’s finances may be missing an important point. If the only thing one cares about is keeping Social Security solvent, that could be accomplished by simply raising taxes or cutting benefits, no matter how bad a deal that makes the program for younger workers. But the goal of Social Security reform should not merely be balancing the books. Rather, we should be trying to provide workers with the best possible retirement option, and that involves giving workers more control and ownership of their retirement funds.

Under the current system, once a worker pays his or her Social Security taxes into the system, the worker no longer owns that money. That’s a very paternalistic system—the government doesn’t trust people to control their own money. In addition, two major problems are created: workers have no right to their Social Security benefits, and workers cannot pass on their accumulated Social Security retirement money to their heirs.

One of the most enduring myths of Social Security is that a worker has a legal right to his or her Social Security benefits. Most workers assume that because they pay Social Security taxes into the system their whole working lives, they have some sort of legal guarantee to the system’s benefits. Unfortunately, exactly the opposite is true. In two landmark cases, Flemming v. Nestor and Helvering v. Davis, the U.S. Supreme Court ruled that workers have no right to receive Social Security benefits. Congress and the president may change, reduce, or even eliminate benefits at any time. Retirees must ultimately depend on the good will of 535 politicians to determine whether and how much they will receive in retirement. Where is the dignity in such a system?

As a matter of fact, Congress has already arbitrarily reduced Social Security benefits. For example, in 1983, Congress raised the retirement age. Given Social Security’s looming financial crisis, additional benefit cuts and/or tax increases are certain. Further, because workers’ future benefits are not guaranteed, politicians tend to make promises today that they may not be able to keep tomorrow. Therefore, the entirely political nature of Social Security puts a worker’s Social Security retirement benefits at considerable risk.

The second major problem arising from the fact that workers do not own the money they pay in payroll taxes is that their heirs cannot inherit their accumulated retirement savings. Upon the death of the worker, no matter how much or how little the worker has paid in taxes or collected in benefits, the money he or she paid into Social Security disappears. None is passed on to his or her children or grandchildren.

Both of these problems are solved by an individual account Social Security system. A Social Security system based on individual accounts would provide workers with the benefits and the safeguards of true ownership. Individual accounts would give all workers a true legal right to their benefits. Social Security would no longer be a political football, and workers and retirees would not have to worry that someone in Washington might cut their benefits. Furthermore, upon the worker’s death, the money in the worker’s retirement account could be passed on to his or her spouse, children, charity, or to whomever he or she wishes. With individual accounts, workers own their retirement savings.

In Chinese, the word for crisis is made up of two characters, one meaning danger, the other meaning opportunity. Social Security’s financial crisis has given us the opportunity to create a better and more secure retirement program. In the end, that is the best reason of all to support individual accounts.

Michael Tanner is director of the Cato Institute Project on Social Security Choice.