FOCUS: The Case Against Private Accounts

By WILLIAM D. NOVELLI

H.L. Mencken, once observed, “There is always an easy solution to every human problem—neat, plausible, and wrong.” Such is the case with creating private accounts out of Social Security money.

Why is this a bad idea, and why should young people—in fact people of every age—care? There are important issues at stake. What form will Social Security take? How much will benefits be? How much risk will you personally face? How will low-income Americans fare? That’s what the debate is really about, not whether Social Security is going to survive. It will. But how will it affect your generation’s future retirement? Now, during this national debate, is the time to become engaged, weigh in with your ideas and opinions, and have a strong voice in deciding the future.

You may think that you won’t need Social Security because you will accumulate sufficient assets to make a government retirement fund unnecessary. You may well be right, but this is a debate critical to all society, including those who won’t be so fortunate.

In case you’re absolutely new to this issue, Social Security is funded by payroll taxes, which current workers pay to fund current retirees. Diverting Social Security money to create private accounts is a bad idea. It would worsen the solvency outlook rather than improve it and lead to large benefit cuts. This approach is risky, hugely expensive, and unnecessary. Diverting a third of the payroll contributions paid into Social Security—the amount usually suggested for private accounts—would cut funding for Social Security and create an estimated shortfall of some two trillion dollars. Eventually, this shortfall would have to be covered by raising taxes, cutting benefits, and/or taking on new debt. And, much of that burden would fall on younger workers.

The essence of Social Security is that it has always been risk-free for all of us. It’s also inflation-proof—something no other investment can guarantee. While many low-income individuals rely on Social Security exclusively when they cease to work, that was not the intention of the program. It was to be a supplement—but something the retired person could count on. The lack of risk was matched by the comparative modesty of Social Security payments. This is neither left-wing nor right-wing dogma: just good social policy.

But private accounts within Social Security would add a large measure of risk. Many individuals do not have the time, the sophistication, or the interest to manage private accounts, thus putting themselves in potential jeopardy. Private investments of any kind may lose money as well as make money. What goes up can always come down, as anyone who has watched the stock market in the last few years knows well. What if the market is down when the retiree needs the money in the private account? And what if it stays down? Most individual investors’ portfolios have still not returned to where they to where they were when the dot-com bubble burst five years ago. A system that relies on good luck and bad luck doesn’t provide a true safety net.

Largely forgotten in our current Social Security debate are the four million people under the age of 19 who now collect Social Security survivor benefits. If you know someone who lost a parent or had a parent become disabled while he or she was growing up, you probably know someone who relies on Social Security benefits. But, if Social Security payroll contributions are reduced in order to create private accounts, these survivor benefits, as well as benefits paid to the disabled, would almost surely be reduced, leaving millions of non-retirees also at risk.

We have conducted a lot of research into what people think about private accounts taken out of Social Security. A recent survey we conducted with Rock the Vote and the Joint Center for Political and Economic Studies shows that 76 percent of all adults believe that Social Security should be protected as a guaranteed benefit and should not be privatized. Seventy-nine percent of Americans aged 18 to 29 believe this, and 72 percent of Americans aged 30 to 39 also believe it.

Most people—among all age, economic, and ethnic demographics—who initially support the concept of private accounts change their minds when they learn more about the likely consequences of implementing them. They overwhelmingly support making less severe changes to the program, and sooner rather than later. Younger voters (those aged 18 to 39) tend most to like private accounts, but not if it means large cuts in Social Security benefits or massive government borrowing.

We do need to reform the Social Security program, but there are less severe and more reasonable changes that we can make. The following two actions, if enacted, would get us well over half way toward solvency, and there are other possible options to consider. First, people currently pay Social Security tax on only the first $90,000 of their income. We could restore the total wages taxed by Social Security to 90 percent of nationwide earnings (right now they are at 85 percent). If the cap is raised, perhaps phased in over a decade, to $140,000, it would lower the projected shortfall by some 43 percent. Second, we could diversify Social Security Trust Fund investments to get a higher return, which could fix about 15 percent of the problem. Reasonable steps such as these are enough to strengthen Social Security for the long-term. And a recent AARP survey revealed that most people support changes like these.

We are certainly not against all private accounts. We have long championed improvements in private savings vehicles like 401(k) plans and individual retirement accounts (IRAs). But for a secure retirement, we need these savings in addition to Social Security, and definitely not at the program’s expense.

Social Security is the most successful domestic program in the U.S. history. It has lifted many older people out of poverty and helped younger Americans who have, in many cases, been relieved of providing financial support to their aging parents. This has helped strengthen the American middle class, enabling nearly 70 percent of Americans to own their own homes and millions of families to send their children to colleges and universities.

We need to make sure its success continues. AARP is working hard on this, and I hope you will help out by opposing private accounts carved out of Social Security. We need to shore up this vital program for the long-term, but we need to do it right.

President Franklin D. Roosevelt, Class of 1904, said it best nearly seven decades ago: “In our efforts to provide security for all American people, let us not allow ourselves to be misled by those who advocate shortcuts to Utopia or fantastic financial schemes.” That was true then. It is true today. In this age of insecurity, Americans of all ages need to know that they can always count on Social Security, both today and in the future.

William D. Novelli is Chief Executive Officer of the AARP.