Jewish World Review Dec. 21, 2004 / 9 Teves, 5765

E. Thomas McClanahan

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Consumer Reports

Involve workers in their futures | In its current monthly Bulletin, AARP - the nation's biggest advocacy group for seniors - explains why it's against creating "private accounts" using Social Security tax money.

Two reasons are offered. One, using Social Security revenue to create the accounts would weaken the system. Two, the costs of switching to a new system would be expensive - up to $2 trillion.

AARP has been opposed to personal accounts for a long time. But the latest statement is notable for its clarity as well as its timing. President Bush will probably push hard for personal accounts in his State of the Union address early next year.

There's more at stake in this debate than Social Security. If the president fails to push through a reasonable reform plan, that failure would be a fatal blow to the larger cause of entitlements reform.

Entitlements are programs - Social Security, Medicare, federal pensions, farm subsidies - whose growth cannot be controlled because they're outside the system of congressional appropriations. If you're in a designated group because of your age or occupation (retiree, farmer), you get the money. The problem is, too many people are becoming entitled relative to the number of people who are paying.

Last year's debate over a prescription-drug benefit under Medicare was a net loss for reformers. The Medicare legislation will give taxpayers a much larger bill in exchange for only a few positive changes, such as health-savings accounts. The battle over Social Security will have much larger implications.

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The broad question is whether we're ready to adopt a new model for middle-class entitlements, one that assumes Americans are smart and self-reliant enough to make choices for themselves.

AARP has adopted a position that is essentially reactionary. It clings to the pay-as-you-go-model for Social Security, while calling for a "full national discussion of all the ideas on the table" - which is what you do when you're not clear on how to proceed.

The Bulletin article is titled "Social Security: Where We Stand," but AARP doesn't have much of a "stand." The article mentions no solution. It pretends we shouldn't worry much about Social Security's looming insolvency. It admits the program "needs some changes," but concludes there's nothing wrong that requires "drastic" action.

AARP fails to appreciate demographic reality. When Social Security began, each retiree was supported by payroll taxes from more than 40 workers. Since then, the ratio has dropped to three workers for each retiree. It will fall to two in about 25 years.

Worse, AARP subscribes to the myth that the Social Security Trust Fund, which supposedly holds more than $1 trillion, contains assets with some sort of economic value. It doesn't. To redeem the Treasury bonds in the trust fund, the government must do what it would do if the bonds didn't exist: raise taxes, cut benefits, go into debt.

Some who oppose personal accounts claim the current program can be easily fixed. The New York Times, for example, urges a "modest package of tax increases and benefit cuts."

But the benefit cuts and tax increases of the magnitude needed won't be modest. Supporters of the existing system - call it the federal dependency model - will go to the mat to block a policy encouraging more self-reliance.

To be sure, some changes in how benefits are calculated may be part of any solution. One idea under consideration would link initial benefits to price growth rather than wage growth - a change that would keep benefits steady; current policy allows their real purchasing power to expand over time. This isn't properly a benefit cut, but even that sort of change will be highly contentious.

A shift to personal accounts would say to each worker: Funding your retirement isn't primarily the government's job. You need to be involved. This is a predictable life-event for which you must prepare. To help to accomplish this goal, we'll give you choices for investing part of your payroll tax in an account that you, and not the federal government, will own.

A system of personal accounts would allow the superior return of the financial markets to cover more of the obligations owed to future retirees.

AARP speaks of the "guarantee" provided by Social Security, but no such guarantee exists. The Supreme Court has ruled that beneficiaries don't have a property right in Social Security. The system is based on political promises, which can be changed.

With a system of personal accounts, part of Social Security would be prefunded for the first time. This would create a mechanism that allows the Social Security system to save for the future, by harnessing the individual decisions of people acting on their own behalf.

E. Thomas McClanahan is a member of the Kansas City Star editorial board. Comment by clicking here.


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