From the WSJ Opinion Archives
OUTSIDE THE BOX
A Reform Campaign
Defense isn't the only kind of security that matters this November.
Today a new set of television commercials will begin to run in the first of 20 congressional districts where the race is too close to call and control of the House hangs in the balance.
The commercials are not about Iraq, or the stumbling economy, or corporate scandals; they are about Social Security, an issue the Democrats believe they can use to defeat Republicans in November. But the ads are not being run by Democratic candidates or groups supporting them; they are educational ads from a group called Compass--the Coalition for the Modernization and Protection of America's Social Security.
One of the central issues Democratic candidates are raising is that Republicans want to destroy Social Security by giving young people the option of choosing an individually owned market investment account in which to put 2% of their income that currently goes to the Social Security payroll tax. Compass believes that diverting a percentage of payroll taxes into such accounts will make it less likely that politicians will reduce benefits or raise taxes when the Social Security system starts running a deficit 15 years from now.
The facts are not in dispute. In 2017, the amount of money the Social Security system must pay out to retired people is projected to exceed the amount of money it takes in. The reason is that as the huge baby-boom generation begins to retire, the number of workers will shrink relative to the number of retirees. Over the next 30 years the number of retirees is likely to double while the number of people working goes up only 14%. In 2017 the deficit is estimated at $9 billion; 10 years later, $206 billion. Eventually it could climb as high as $25 trillion. So the government is going to have to raise Social Security taxes by 50% or cut benefits by 32%, or some combination of the two, if the system is to be kept as it is.
Social Security isn't a good deal for young workers planning to retire in 30 years or so. President Bush's Social Security Commission calculated that workers paying the maximum payroll tax would have to live to 110 just to get their money back. For single 30-year-old men the rate of return of Social Security is but 1.13%; for their female counterparts, just 1.59%.
On the other hand, there are some pretty good market-based retirement systems out there, with one of the best enjoyed by--who else?--members of Congress. Since 1986 the Federal Thrift Savings Plan has congressmen to contribute up to $10,500 a year into a personal account that can be invested among five market funds of varying stock and bond mixes. The worst-performing fund has averaged over 4.3% growth annually; Social Security's yield is but 2%. When Rep. Robert Walker (R., Pa.) and Rep. Pat Schroeder (D., Colo.) retired in 1997 they had each accumulated $4.1 million under these plans, which they took with them when they left.
It sounds as if the best way to get better retirement benefits is to allow us access to the kinds of plans members of Congress already have--individual market accounts. And Mr. Walker and Ms. Schroeder's experience illustrates one enormous benefit to market-based accounts: When you retire, the money in them belongs to you. Social Security gives you no personal assets. Those who can afford to put money in an Individual Retirement Account or a 401(k) already have this privilege, but individual Social Security accounts would extend it to everyone.
In spite of the unease the current decline in the stock market has created among investors big and small, over time the stock market has been the best investment an individual can make, yielding about 6.4% a year over the long term. That's better than U.S. Treasury bonds (3.4%) or Social Security (about 2%). Yes, markets go down as well as up, but as The Wall Street Journal reported, the financial consultancy firm Ibbotson Associates calculated Standard & Poor's 500 stock index has "lost money in 22 of the past 76 years, or 29% of the time. But if you lengthen your time horizon to five years, your chance of losing money falls to just 10%. Got 15 years to invest? Since 1925, there have been no 15-calendar-year stretches when you would have lost money." Finally, the United States is not alone in having to deal with retirement-system challenges. Some 20 other nations--including Britain, Chile, Mexico and Sweden--have already implemented various kinds of market retirement systems, and their 80 million citizens are comfortable with them.
But facts have little to do with campaign rhetoric. Democratic candidates are claiming that market accounts will destroy Social Security. They have already persuaded half a dozen Republicans in crucial House races to come out against the idea and are pounding away on dozens more. Sen. Jean Carnahan, running in Missouri, "took the pledge" against changing Social Security; in the North Carolina Senate race Democrat Erskine Bowles is running ads against Republican Elizabeth Dole attacking her market-based plan for solving the system's approaching shortfall. The Democrats never say how much they would raise taxes or cut benefits if Social Security is maintained as is, only that the market solution is a threat to older Americans.
There are two ways to fight this disinformation. One is to educate the public about how Social Security can be changed for the better, as the Compass ads do. They point out that the voluntary personal account for young workers will avoid tax increases for them and avoid benefit reductions for their retired parents and grandparents. You can see Compass's analysis here.
Another approach, put forth by the National Center for Policy Analysis (with which I am associated). The NCPA presents arguments for and against reform and accurate information on claims by candidates, reporters and government agencies about the Social Security issue. A weekly e-mail summary outlines who said what and what the facts--as opposed to the campaign rhetoric--really are. You can see how Washington Post reporter Jonathan Weisman reports less than the whole truth about reform proposals, what House Minority Leader Dick Gephardt and President Bush have said, and what a host of other office holders and other officials have said.
Beneath the debate on war in Iraq, farm subsidies and the current economy lies an enormous issue that will determine the retirement incomes of older Americans, the tax rates paid by younger ones and the economic state of the nation for decades to come. So tune in and log on; it matters a great deal to you and your kids and parents.
Mr. du Pont, a former governor of Delaware, is policy chairman of the Dallas-based National Center for Policy Analysis. His column appears Wednesdays.
