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Wednesday, February 23, 2005

Paul O'Neill: A new idea for Social Security

This is probably the best idea that I have heard or read.

Paul O'Neill: A new idea for Social Security

[Paul O'Neill, former chairman of Alcoa and Treasury secretary in the Bush administration, lives in Shadyside. He wrote this for the Los Angeles Times.]

To 'pre-fund' the needs of old age, a new twist on the idea of private accounts
Wednesday, February 23, 2005

The debate over what we should do, if anything, with the Social Security system is heating up. A political campaign-style assault has already begun; in the weeks and months ahead, prepare to be buried in markedly different versions of the truth.

If you are like me, you hunger for something better from the political class. How about a new idea to offer financial security for each American when he or she reaches retirement age? Here's one way.

If we decided as a society that we were going to put $2,000 a year into a savings account from the day each child was born until he or she reached age 18 -- and if we assume a 6 percent annual interest rate -- each child would have $65,520 at age 18. (The worst return for a 25-year investor in the stock market from 1929 before the crash to 2004 was an average of 6 percent a year.) With no further contributions, again with a 6 percent interest rate, those savings would grow to $1,013,326 at age 65.

If we began to do this now, the first-year cost would be $8 billion; that is $2,000 times the roughly 4 million children born each year. The second year would cost $16 billion and so on until we were contributing $2,000 per year to a savings account for every child from birth until age 18. When fully implemented, the cost would be $144 billion per year. To put this $144 billion per year into context, this year's combined spending for Social Security and Medicare will exceed $750 billion.

What this plan would do is "pre-fund" for the needs of old age. It solves the long-term financing problem for both Social Security and Medicare, allowing for the gradual replacement of programs like Supplemental Security Income and Medicaid and food stamps and housing aid for those over age 65. To make this work, the savings account money would need to be invested -- my suggestion would be through so-called index funds. The administrative costs would be practically nothing because there's no need for a huge separate tax collection bureaucracy; the money would come from the general revenues of the U.S. government.

To be clear, this is a decision for our society to make. The U.S. government is just the instrument to bring it into effect. There are two crucial facts that distinguish this idea from traditional Social Security. The savings would be owned by the individual, and every person would have an account. (Everyone born before the plan went into effect would remain under the current Social Security system.)

Equal coverage for every American is an important part of this concept. Traditional Social Security does not provide equal coverage. For example, stay-at-home spouses receive a smaller "dependent's" benefit, and some Americans are not covered at all. In effect, this would be a new birthright for those fortunate enough to be born here.

You might ask, "Can we afford it?" My answer is, in a federal budget of more than $2 trillion, we can certainly afford it. In an economy that will be upward of $12 trillion this year, we can afford it. By the time this plan was fully implemented, we would be living in an economy of $20 trillion. We can afford it.

Some may say, "This is a terrible idea because more illegal immigrants will come here to get this benefit for their children." I say hogwash. The question suggests we should make our country a less desirable place in order to reduce illegal immigration. The proposition is absurd.

Some will argue that this prospective gift from society will reduce the incentive to save. There are two answers to this concern. First, as this idea is implemented, we will be saving because the money to pay for this will be coming from our taxes. Let me say this directly: This is savings. Second, maybe you know some 20-, 30- or 40-year-olds who would scale back their quest for current income because of some prospective annuity at age 65. I don't know any of those people.

This is a clear and straightforward concept. Why haven't we done something like this?

Over the last 30 years, both political parties seem to have stopped generating truly new ideas. And political mechanics have taken over in place of the visionaries who thought up Social Security in the first place.

If we could put this idea in place to begin ensuring old age financial security for future generations, it would reshape the action we need to take now to meet our obligations under the current Social Security system. Are there any politicians listening out there?