A former president of the University of Chicago suggested that I use the American Economics Association's member directory to find someone in the academic community who would be willing to review my plan. I thought it was a good idea, so I sent the following message to 7,611 of the students and professors listed in the directory. I received a total of 32 replies.
Alternative Proposal for Social Security Reform
“Social Security benefits are considered to be only one part of a complete approach to retirement planning. In contemporary parlance, Social Security benefits are described as the ‘foundation’ upon which individuals can build additional retirement security through company or personal pensions and through savings and investment.” - Social Security Administration
My name is Adam Florzak, and I am 23 years old. I believe that the greatest threat to American workers is not the Social Security issue, but the recent instability of corporate pensions and the low returns on savings accounts. I have recently put a tremendous amount of effort into a plan that is designed to strengthen all three of these areas simultaneously. My plan will introduce add-on accounts to the Social Security system without putting Social Security benefits at risk. It will facilitate the repayment of the Social Security trust fund while refinancing the national debt and creating a secure pension program for all Americans.
To a certain degree, Social Security could be considered a cross-generational wage swap. Using this scenario, the first year of a young person’s career overlaps with the first year of an older person’s retirement. Wages typically increase over time, and theoretically this is how Social Security is able to provide a return on investment. For example, a fixed percentage on the standard wage of a carpenter will be worth more today than the same percentage on a carpenter’s wage 40 years ago. Therefore, Social Security has been able to provide inflation-protected returns on contributions to the system. However, people have tried to extract more from Social Security than it is able to give. Also, the changing demographics (decreased ratio of workers to retirees) have exacerbated this problem.
A “pay-as-you-go” system will work well enough when both the working population and the economy are expanding, but such a system will begin to experience deficits when these areas experience declines. Social Security is a great program, and it has been a great accomplishment for our society. However, the underlying conditions that allowed Social Security to be profitably self-sustaining in the past no longer exist. This in no way means that Social Security is facing bankruptcy. On the contrary, there will always be American workers paying into the system, and these payments will continue to provide Social Security with a steady cash flow. Nevertheless, future benefits may need to be cut to meet the changing demographics of our great nation.
Social Security is a social insurance program that is designed to support each generation when they reach a retirement age. It is important to understand how the system really works; Social Security returns should not be analyzed in the same way as other investments. We cannot afford to spend massive amounts of money in an attempt to make Social Security something that it is not and cannot be. No one expects to receive a positive investment return on other types of insurance premiums. While this is certainly a disagreeable thought, it is simply a reality of the program’s design. Given these considerations, we should not continue to increase payroll taxes and thus our overall dependence on Social Security. We should not sabotage Social Security in an effort to save it, but we should make provisions for the upcoming financing challenges.
Most politicians fail to mention the effect of transitional borrowing on the stock returns in private accounts. Social Security is a “pay-as-you-go” system, and this means that the money coming into the system in the form of payroll taxes is immediately going out of the system in the form of benefit checks for current retirees. If money is taken out of the system for the purpose of investing in stocks, there will not be enough money left over to pay the promised benefits. Therefore, the government must borrow money in order to finance the conversion to private accounts.
For every dollar invested in a private account, another dollar must be borrowed in order to pay out the currently scheduled Social Security benefits. As of February 28, 2005, the average annual interest rate on all government debt is 4.553%. While a private stock account may return the historical market average of 7% in a given year, the debt it creates will cost around 4.553%. Since taxpayers are responsible for making the interest payments on the national debt, the true return on a privatized account will be only 2.447% if stocks continue to appreciate at an average rate of 7%. Therefore, the true return on a private account will only be the amount that exceeds the cost of the debt. Private stock accounts will not provide much better returns than the current Social Security system, but they will expose the system to greater risk.
Social Security Budget Outlays:
http://www.ssa.gov/budget/2004bud.html
2002 FY (actual): $489.9 billion
2003 FY (estimate): $514.4 billion
2004 FY (estimate): $534.7 billion
National Debt Interest Expense:
http://www.publicdebt.treas.gov/opd/opdint.htm
2002 FY (actual): $332.5 billion
2003 FY (actual): $318.1 billion
2004 FY (actual): $321.5 billion
We are paying almost as much in interest payments on the national debt as we are in Social Security benefits. Also, even though the Social Security trust fund has already been spent, its special issue bonds currently earn approximately $80 billion in annual interest payments that go back into the program. When the government issues new bonds in order to pay back the special issue trust fund bonds, the Social Security system will lose that interest money to outside investors.
Americans are already paying their share of the interest on the national debt. However, the national debt is currently serving to redistribute wealth from the people to the wealthy and foreign governments. My plan, which is entitled PACT America, is designed so that each person will begin to benefit from this interest through the secure pension program. It is not simply a program to invest in government bonds. Instead, it will pay a slight interest premium (which is not any higher than some portions of the debt are currently receiving) and then apply any unused accrued interest towards the national debt upon an account holder's death.
The PACT America program is designed to be either a supplement or replacement for the traditional employer based pension plan. It will allow American workers to change employers while still keeping the same pension plan, and it will also protect them from a loss of pension due to corporate layoffs, scandals, or bankruptcies. These add-on accounts will help eliminate the uncertainty surrounding corporate pensions while providing the government with secure long term financing on the national debt at reasonable interest rates. Current projections show that Social Security will be able to pay full benefits for many years if the trust fund is available for use, and it would be unwise to make any drastic changes to the system at this time. Therefore, the PACT America personal add-on accounts will help Social Security to remain intact and age gracefully while allowing younger workers the ability to make adequate provisions for the future.
I have shared my plan with people all over the country, and so far I have sent out more than 20,000 pages in faxes to Congressmen. Politicians often say that they are concerned for “our children and grandchildren” when discussing the future of Social Security, yet the same people who claim to be acting on my behalf will not even take the time to listen to my concerns. While I’ve heard many impassioned pleas and finely crafted speeches, I have also read the reports and researched the details. All I can say is that I would like to believe there was a time in America when more attention was given to the plan than to the presentation. Eloquent words are a poor substitute for excellent deeds.
I have structured my entire life around working on the Social Security issue, and I have received no outside assistance or compensation for this project. I am not enrolled in any university program nor am I a college graduate. Nevertheless, I feel that I am uniquely qualified to work on this issue. I know that you must receive many blind letters on various topics, and you probably do not have time to read them all. However, I would be thrilled if you would take the time to think about my ideas. Please contact me with any questions that you may have, and I would also like to send you a complete copy of my report. Thank you for your time and consideration, and I look forward to hearing from you.
