By Craig R. Smith
CEO, Swiss America
Feb 3, 2005
"Social Security, on its current path, is headed toward bankruptcy. And so we must join together to strengthen and save Social Security. Your money will grow, over time, at a greater rate than anything the current system can deliver and your account will provide money for retirement over and above the check you will receive from Social Security," -President GW Bush, State of the Union Address, 2/2/05
I want to applaud Bush's courage to take on Social Security reform, the so-called untouchable "third rail" of politics. In his State of the Union Address, president Bush placed Social Security reform at the very top of his agenda, officially putting it ahead, in importance, of the war in Iraq. This was his first State of the Union as a second-term president, and a vast contrast to the address three years ago in which he prepared the American public for the war on terror and also seemed much less confident.
Although his speech revealed few details of his reform plan, a central element relies on younger Americans investing up to one-third of their payments in private, government-approved accounts that would be invested in "stocks and bonds." Only those born after 1950 would be eligible to do so.
A PLAN TO UNITE PARTIES
Instead of dividing the nation -- as politicians usually do -- I think the issue of Social Security reform could actually be an enormous vote-getter for both the Republicans and Democrats alike IF they will unite behind a marketable plan, such as H.R. 4851 proposed by Rep. Paul Ryan (R., Wis.) and Sen. John Sununu (R., N.H.) with no benefit cuts and no tax hikes. (Also known as the "Social Security Personal Savings and Prosperity Act")
Under Ryan's proposal workers would be able to shift to their personal accounts 10 percentage points of the current 12.4% Social Security payroll tax on the first $10,000 of wages each year ($1,000) and 5 percentage points on all taxable wages above that. People could put up to $5,000 a year into their personal accounts. This would come to an average contribution of 6.4 percentage points among all workers.
Serious would-be Social Security reformers must make the case to workers in terms of their financial benefits from private accounts. The Ryan-Sununu bill would give workers higher monthly benefits of 30 to 40 percent over their retirement years according to the research of Let Freedom Ring, Inc. who has developed a new new tool for long-term analysis called "The Templeton Curve."
The Templeton Curve was named for Dr. John M. Templeton, Jr., the son of Sir John Templeton, founder of the Templeton Funds, who was recently hailed by Money magazine as the "greatest stock picker of the [twentieth] century." This tool can help to chart the cash flow impact of any Social Security proposal. The span of time measured is seventy-five years. The basis for the Templeton Curve is the cash flow analysis portion of the "Financial Effects" studies performed by the Office of the Actuary of the Social Security System.
So far, only two reform Social Security reform proposals have been scored according to this Templeton Curve system by the Office of the Actuary: The Ryan-Sununu Bill, also known as the Social Security Personal Savings and Prosperity Act and the Kolbe-Stenholm proposal, also known as "The Bipartisan Retirement Security Act".
For the first time, the Templeton Curve makes it possible to see the effects of these various complex proposals in terms that are easy to grasp, both visually and conceptually. As you can see, the Ryan-Sununu Bill is the winner hands down over the long haul.
RETIREMENT OWNERSHIP STRATEGIES
"A good man leaves an inheritance for his children's children."
The good news is that George Bush wants the private investment accounts to be the centerpiece of any reform plan. These private investment nest eggs give workers financial security that comes with personal ownership. Bush also wants to put the Social Security system on a sounder financial footing by erasing at least a portion of the long-term unfunded liability of the system. Today, those liabilities - the promises to pay benefits above and beyond the payroll tax collections - exceed $10 trillion. Medicare's unfunded liability is even more daunting, somewhere near $34 trillion.
So, how can we supporters of reform make a more popular case for private investment accounts? I would suggest seven strategies:
1. STRESS THAT SOCIAL SECURITY REFORM SAVES - NOT COSTS - MONEY. The creation of private investment accounts is said to cost $2 trillion, but it saves $10 trillion in later years. Since young workers eventually will receive their benefits from their private accounts, government will no longer bear the obligation to pay those benefits. Wouldn't most Americans invest $2 now to get $10 back in 20 years?
2. STRESS THAT THE SOCIAL SECURITY CRISIS IS FAR FROM IMAGINARY. Ever since Paul Krugman of the New York Times wrote that Social Security isn't broken, this has become the rallying cry of the left. But many analysts find just the opposite. The system will crater when the baby boomers retire fully. Even the Social Security Administration's own actuaries see doom and gloom if reform steps aren't taken now.
3. EXPOSE OPPONENTS FOR WANTING TO RAISE TAXES. If benefits are not cut, and private accounts not created, the only option is to raise taxes on workers to cover gigantic funding shortfalls. The option of doing nothing now, really means raising taxes a lot, later.
4. STOP TALKING ABOUT BENEFIT CUTS IN THE FUTURE. Trimming Social Security benefits in the future risks an enormous political backlash against the reformers in both parties. The truth is that personal accounts for Social Security will allow Americans to have higher, not lower retirement benefits. Cutting social security benefits to get private accounts is like "paying for tax cuts" with other tax hikes.
5. MAKE THE ACCOUNTS BIG AND MEANINGFUL. Big accounts, like the 6.4 percent accounts under Ryan-Sununu will accumulate large amounts of dollars quickly. These large accounts thus help lower the long-term funding problem because workers will no longer need to draw on promised benefits.
6. STRESS PRIVATE OWNERSHIP AND CONTROL. The issue of Social Security is not so much about financial viability as it is about who should control the money? The worker or the government. Private accounts empower workers with control of their own money. That is a powerful free-market concept.
7. ALLOW RETIREMENT ACCOUNTS TO INCLUDE TANGIBLE ASSETS. If the government were to allow the same type of investments that are currently allowed in individual IRA accounts, then U.S. gold and silver coins could serve as a hedge against a falling dollar, rising interest rates and a stagnant or falling stock market, as Dr. Ray Lombra illustrated back in 1998.
Bush won the Social Security debate during the presidential campaign by talking about core American values: private ownership, fiscal responsibility, worker empowerment, and caring for the future of our children and grandchildren. This is how reform triumphs over rhetoric. Fellow conservatives endorsing The Ryan-Sununu Bill, including Newt Gingrinch, The Heritage Foundation, CATO Institute, Steve Forbes and many more.
The most difficult issue is to convince Democrats that we should move away from a Welfare State and toward a Freedom State. Thankfully Bush is smart to take his arguments to the people -- who can then pressure Democrats to support it. Critics of privatization are concerned that Wall Street today NEEDS the boost from trillions of dollars of Social Security's money into the speculative markets to help prop up the stock market, the U.S. dollar and help cover the United States' bulging current account deficit, which foreign investors are becoming increasingly unwilling to do.
The critics point is well taken, which is why I suggest that any privatization plan allows the inclusion of U.S. gold coins as a safe haven for stock market uncertainty -- and which has also proven over the last 5 years to have an excellent growth potential, rising over 60%.
Bottom line: We must do something now, or make our kids face the consequences later. I suggest we do it now, as president Bush said, for the sake of "The State of Our Kids Union"!
2-2-05 -- SOCIAL INSECURITY: An Overview of the Social Security Crisis And Solutions - SATC
1-1-05 -- CONVERT A RETIREMENT NIGHTMARE... INTO A GOLDEN DREAM! - SATC, IRA Information
2-2-05 -- Seniors Support President Bush - 60plus.org
2-3-05 -- Bold and Responsible: The President's Plan To Improve Retirement Security - by David C. John
1-31-05 -- The Right Stuff - By Steve Forbes, FORBES
DISCLAIMER: All of the provided information is believed to be accurate, however errors are possible. The opinions in the Commentary section do not necessarily reflect the opinions of Swiss America. Past performance of any investment is no guarantee of future performance. All investments have risk.