January, 1998
"Keeping The Promise &
Changing The Future"
Introduction
In May, 1997, the Social Security Opt Out Resolution, having been referred from the House Human Resources Committee, which I chaired, passed the House with a bipartisan 31-22. Passage of that bill, SCR 2, made Oregon the first state in the nation to officially petition Congress to establish a waiver system for states to design and implement alternatives to Social Security for all residents.
Will the states take over Social Security? The fifty states are successfully reforming welfare, which was a $5 trillion federal failure. Clearly, if the federal government continues to ignore the ticking time bomb, the states can, in fact, succeed in keeping the Social Security promise. And if the federal government attempts to prop up the current pay-as-you-go scheme with a reform recipe of benefit cuts and tax increases, then devolution to the states might be the only answer.
Social Security's promises can be kept without benefit cuts and tax increases if future retirees are offered a market-based alternative. The changes proposed for Social Security in Oregon have already been implemented successfully. Thousands of federal, state and local government employees opted out until that choice was taken away in 1983. More recently, entire nations including Chile, Great Britain and Mexico have allowed citizens to opt out of national pension plans. These individuals are now enjoying market rates of return on private retirement account savings.
However, if State Opt Out Resolutions convince Congress that the entire national system must be changed along these lines, then state legislators can take well-deserved credit for the most important program reform in American history.
However, by making the right changes soon, there's still time to avert the disastrous effects on Social Security posed by the Baby Boomer retirement. Continuing under the present set-up virtually guarantees that no-one under the age of 40 will ever receive Social Security in retirement, yet they will be forced to pay more than 15% of their wages for Boomers' benefits.
The Opt Out Resolution itself changes nothing. If Congress permits it, states would be allowed to assume the federal responsibility for collecting retirement taxes and paying benefits. Under this approach, benefits for current retirees would be identical to the existing Social Security benefits schedule. The states that opt out could ensure that current retirees' benefits would be equal to or greater than the Social Security promise, even if Congress cuts or delays benefits.
If our waiver was approved by the federal government, every citizen in the state could opt for a Private Retirement Account (PRA) into which a fixed part of their earnings would be deposited. The individual would control the way the savings were invested by choosing investments and allocating assets, so as to provide a likely minimum rate of return, plus the opportunity for greater returns as well. Risk would be protected by state regulatory safeguards alongside established federal and industry regulations already in place.
For those who don't have time to build enough savings in their PRA to get them to the Social Security benefit level, the state would make up the difference financed with existing levels of employment taxes. Younger people who still have 20 or more working years before retirement would receive benefits from their PRA several times greater than the Social Security promise. To see the comparisons for yourself, try the simple Java calculator on the Internet at www.socialsecurity.org.