Advertisement
YOU ARE HERE: LAT HomeCollections

THE NATION / SOCIAL SECURITY

The Best of Both Bush and Gore

October 22, 2000|Maya MacGuineas | Maya MacGuineas, a fellow at the New America Foundation, was an advisor to the John McCain presidential campaign

WASHINGTON — While politicians have been hesitant to discuss reforming Social Security, an issue long considered to be the third rail of politics, things are different this presidential election. Emboldened by optimistic surplus projections and increasing public support for overhauls to the system, Texas Gov. George W. Bush and Vice President Al Gore have both put forth proposals they claim will strengthen retirement policy.

On their own, neither will. While Bush's plan abandons much of the progressivity of the current system, Gore's creates a large new entitlement program that actually does nothing to strengthen Social Security. And the financing of both plans is too dependent on optimistic projections of budget surpluses. But by taking the strengths of each plan and combining them, one could create an even better reform package.

"Partial privatization," as recommended by Bush, would allow workers to divert 2% of their payroll taxes into newly created private investment accounts. Once the accounts accumulated sufficient assets, they could be used to offset future benefit reductions that will be needed to keep Social Security afloat. While Bush has neglected to explain how he would pay for his plan, it addresses one of the fundamental problems facing the Social Security program: unacceptably low returns. A phenomenal deal for early generations who received double-digit returns, Social Security has become a second-rate deal for younger workers and those just entering the system. Current returns on contributions are expected to be in the neighborhood of 1% to 2% or even negative. This bad deal already has created an erosion of support from younger generations.

The centerpiece of Bush's proposal, private accounts, addresses the problem of low returns head-on. By shifting funds out of the current direct-transfer program, in which each generation's taxes are used immediately to pay for benefits, into productive investments, workers would benefit from savings and compounding interest over the decades of their working lives. Their returns would far outweigh what they can expect from Social Security today. But though it is likely that most workers would benefit to some extent, the wealthiest would benefit the most. For example, assuming 6% real returns and 2% real wage growth, a worker earning $15,000 would accumulate $130,000 by age 70. An average earner making $35,000 would have $300,000 and a high-income earner making $75,000 would have $640,000. Additionally, the accounts would be used in part to replace future Social Security benefits, which are structured to be progressive. So under partial privatization alone, much of the system's progressivity would be lost.

This is where the Gore plan comes in. Under "retirement savings plus," a separate program would be established in which workers would contribute funds on top of their payroll tax into tax-deferred investment accounts. Savings of low- and middle-income workers would be augmented through generous government matching grants and tax credits. As currently proposed, the government would match private savings at a rate of 3-1 for couples earning below $30,000, 1-1 for those earning between $30,000 and $60,000, and 1/3-1 for those making up to $100,000, with no matches for those earning more than $100,000.

There are three major weaknesses with this plan. First, it is not part of Social Security and therefore does nothing to strengthen the system or increase its returns. Second, most poor workers do not have the additional funds to save, even in the face of generous incentives, so the program would become a costly subsidy to middle-class Americans. Finally, if by some miracle all workers took advantage of the available matches, the program would become prohibitively costly. As the vice president readily admits, this initiative is one of the largest programs of tax-free, private savings ever proposed. Realistically, the level of matches would have to be scaled back to keep the program affordable.

Advertisement
Los Angeles Times Articles
|
|
|