On a Saturday night before the Tuesday election, at a tumultuous rally in Madison Square Garden, Roosevelt replied in what Davis calls “one of the great political speeches in American history.” “Only desperate men… would… foster the current pay-envelope campaign against America’s working people.” The intent of Roosevelt’s new program was clear: “insurance,insurance, insurance.” His central theme: it is the worker’s money.
The 1936 election settled the matter in one sense. Democrats had a winning issue they could use against Republicans whenever the need arose. All of a sudden, however, we find ourselves in a presidential campaign in which Social Security is again a central issue. Save this time the advantage may be to Republicans. The issue is personal savings accounts. The first uniquely American idea in social insurance: concluding a working life with a measure of wealth.
Ironies abound. First of all, despite the flawless performance since retirement checks were first sent out in 1940, a majority of nonretired adults don’t think they will get theirs. You can speculate why. Our judgment is that until just recently, the administrators of Social Security never troubled to be in touch with “clients” to assure them their names and contributions were on file, while estimating their expected pension. It was enough that the bureaucracy knew.
The second irony is harder to take. Namely, that unless a short list of corrections is made in the way we now calculate benefits, in short order–15 years–the system will no longer pay for itself.
For the moment, Republicans seem to have grasped this. Perhaps it is easier for them. After all, they said so 65 years ago! No matter. If we can’t bring ourselves to accept this, and act on it, in no time at all we will be paying retirement benefits out of general revenues–meaning income taxes. This change will alter the relationship between the benefit you receive and what you paid into the system. Social insurance will have become social welfare. Everything Roosevelt rejected.
The needed changes are four in number. Correct the consumer price index to obtain an accurate measure of inflation. (Benefits are indexed to inflation.) Bring all newly hired state and local employees into the system to avoid overly generous payments to those workers who take part-time jobs. Tax benefits in the manner in which private pensions are taxed; that is, Social Security benefits would be taxed to the extent that a worker’s benefits exceeded his contributions to the system. Add three years to the computation period in the benefit formula, to reflect the fact that workers will have additional years of earnings as life expectancy increases. Result: actuarial balance for 75 years.
That is the medicine. Here is the reward. With these measures in place, the trust fund will no longer need the extra 2 percentage points added to the payroll tax in the 1970s. The rate is now 12.4 percent, and only 10.4 percent is needed. We can offer employees a choice about what to do with the extra 2 percent, including depositing it in a personal savings account.
Federal employees have had such an option since 1987. There are three investment funds: government bonds, corporate bonds, a stock-market index. Returns vary by choice. You can switch around, but you are not “playing the stock market.” A median-income worker over 45 years will accumulate an estate of something like $350,000. Existing retirement benefits are untouched.
It is becoming commonplace to say that the distance from the bottom to the top in American life is widening, both in terms of income and wealth. Wouldn’t it advance the common good to have taxi drivers and mill workers acquire a certain amount of wealth in their working years? An estate? Would it not add to the fund of public trust for folk to get an annual statement recording how their investments are going? A three-tier system: Social Security, employer pensions, personal savings accounts.
In any event, Governor Bush has called for a “bipartisan” plan along these lines. (We introduced legislation in March 1998.) Vice President Gore has called for “Retirement Savings Plus.” But first, for both candidates, both parties, are those four preconditions. Swallow hard, do it, and history may be as kind to us as to those New Dealers.
