On the Hill: The NASE Backs New Self-Directed
Accounts for Retirement Savings
Social Security is an important part of American life. It has helped
provide dignity in retirement to millions of citizens, but the system is
in financial trouble. Fewer and fewer workers are supporting
more and more retirees for ever longer retirements. The self-employed have
a huge stake in protecting and reforming Social Security, so the NASE is
getting involved.
A January report by the Advisory Council on Social Security underscored
the urgency of the problems facing Social Security. The system will be running
a deficit within about 15 years and will be totally bankrupt a few years
later. Because the sums of money involved are so large perhaps a trillion
dollars overall it is imperative that the problems be addressed soon. Relatively
small steps taken now can forestall the need for drastic steps later.
Most plans to shore up Social Security involve:
- raising taxes, cutting benefits and increasing the retirement age;
or
- initiating "self-directed accounts" that allow individuals
to deposit a portion of their Social Security taxes into IRA-type accounts;
and/or
- allowing the federal government, rather than individuals, to invest
the Social Security funds.
Most members of the council supported backed some form of self-directed,
IRA-type accounts for a portion of Social Security taxes.
After careful consideration, the NASE is backing this approach. Such
accounts would yield higher benefits to future retirees than the current
system and would free future workers from much of the tax burden of Social
Security. The NASE is skeptical of another option which would allow the
federal government to do the investing.
Increased taxes and reduced benefits?
"Simply increasing Social Security taxes and reducing benefits is
a completely unacceptable answer for self-employed Ameri cans," NASE
President Bennie L. Thayer commented when the Advisory Council on Social
Security report was released.
"Already the self-employed and only the self-employed are triple-taxed
on Social Security. We pay the employer's and employee's share of Social
Security taxes, a whopping 15.3 percent. Then we're taxed again on the employer
share, which is not deductible from federal income taxes."
A bipartisan study two years ago estimated that Social Security taxes
might have to increase beyond 25 percent to meet the system's future shortfall.
A tax increase of that magnitude would not only wreak havoc on the self-employed,
but would also be ruinous to the economy as a whole. Such a steep tax on
employment would surely cost millions of jobs.
Social Security benefits are currently inadequate for most people's retirements.
Increasing taxes and reducing benefits would hit the self-employed hardest
of all triple burdened with triple tax increases and then handed lower retirement
benefits.
Should government do the investing?
The NASE also opposes letting the government invest Social Security funds
in the private sector. Investing hundreds of billions of dollars over time,
the government would end up partly or wholly owning -- and, inevitably participating
in the management of -- thousands of companies. The potential for political
mischief would be almost limitless. Two years ago, the public resoundingly
disapproved of proposals for government-controlled health care. Today, the
public seems to acknowledge that the era of big government is over. Allowing
the government to own large pieces of the private sector is definitely not
the answer to Social Security's problems.
Self-directed accounts provide an answer
Although letting individuals invest a portion of their own Social Security
taxes would be a break from tradition, it is not a new concept. Millions
of Americans already save for retirement with IRAs, SEPs, 401(k) plans and
other pension and annuity investments. The self-directed Social Security
accounts would be similar.
There are two powerful arguments for adopting a system of self-directed
accounts. First, the system would restore fiscal integrity to Social Security.
Despite its name, the Social Security Trust Fund is not a true trust fund.
It has no
cash on hand. Most of the funds that the Social Security system collects
through taxes are paid out to current beneficiaries, not deposited in an
account somewhere. The funds left over (and Social Security is temporarily
running a surplus now) are used to purchase special Treasury bonds. These
bonds are essentially government IOUs, a promise by the government to tax
future generations to pay off the bond holders. Indeed, the actual value
of the bonds is uncertain, since they are not bought and sold on the open
market. Worse, these bonds are used to mask the true
size of the federal government's deficit spending.
The second argument supporting self-directed accounts is that the new
system would fit population trends better than the current Social Security
system. In 1945, 20 workers supported each Social Security beneficiary.
The average life span was about 65 years, meaning many people died before
they even collected Social Security benefits. By 1995, about three workers
supported each Social Security beneficiary. The average life span was just
over 76 years, meaning most people collected Social Security benefits for
more than ten years. By 2020, there will be only two workers supporting
each retiree. And, on average, recipients will be living until about
age 80.
This cannot be sustained. Critics say that Social Security is beginning
to resemble a so-called "Ponzi scheme," in which early investors
are paid off with cash from later investors, leaving later investors holding
the bag.
The NASE believes that existing benefits should be kept in place for
retirees who are currently drawing Social Security. Workers in their middle
wage-earning years should be given a choice of staying in the old system
or moving to the new self-directed accounts. Younger workers should be shifted
into the new self-directed account system.
At the same time, the NASE feels that the federal government has an important
duty to set high standards for the investment of Social Security funds.
Only those investments which meet strict, objective criteria for financial
soundness should be eligible to receive Social Security funds. And those
investment vehicles that do make the grade should be required to publish
their performance records in a plain English, standardized format.
Simply put, allowing workers to invest a portion of their Social Security
taxes would increase benefits and cut taxes. Studies have
shown that long-term investments in private stocks and bonds would have
yielded two to six times as much as current Social Security benefits do,
even when taking into account the Great Depression, subsequent recessions
and market corrections. That goes for the lowest paid workers, as well as
the highest paid.
Allowing such investments would also reduce or eliminate the Social Security
tax burdens of future generations. Such investments would help the economy
by increasing the savings pool the same pool that small businesses and the
self-employed draw on to borrow funds for their businesses.
The NASE will be at the forefront of the fight to achieve this vitally
needed Social Security reform.
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