Saving Social Security:
A Solution for three generations and beyondJohn R. Kasich (R-OH), Chairman, House Budget Committee
Op-Ed June 24, 1999Most Americans know that Social Security is headed toward bankruptcy. Nothing makes the point better than the poll taken a couple of years ago in which young people said they had a better chance of spotting a UFO than receiving Social Security benefits.
But many may not know why the system is threatened. In order to develop a solution-one that meets my goal of saving Social Security for today’s retirees and those near retirement, the baby boomers and their children-we need to understand the serious difficulties facing Social Security.
Defining the problem
Believe it or not, in 1945 there were about 42 workers for each person receiving Social Security benefits. By 1960, that ratio had shrunk to about 5 to 1. Today, it’s 3.4 to one and by 2030, there will be just 2.1 workers for each beneficiary.
At the same time, Americans are living longer. That’s good news. But it means retirees will receive benefits for a longer period. Americans are also having fewer children, which means relatively fewer workers paying Social Security payroll taxes. It is those taxes that finance current benefits.
Aside from these demographic trends, first-time Social Security benefits are growing far faster than inflation. These benefits now rise with overall wage growth, and wages are rising faster than prices. The result: over the next 75 years, benefits will increase more than 20 times, while prices will go up at half that rate. A retiree in 2060, for example, has been promised annual benefits starting at over $140,000.
The result is a system that would require people in the future to work longer hours and pay more in taxes to support retirees. By 2034, payroll taxes would need to be increased by 50% to pay promised benefits or benefits would need to be slashed. Between now and 2070, benefits will exceed payroll taxes by a cumulative $120 trillion.
Is it any wonder young people don’t expect to receive their Social Security?
We must do better, and we can. Every generation of Americans has left a legacy of prosperity for its children. We cannot let our legacy be a Social Security system drowning in a sea of red ink.
The Kasich Social Security solution
My plan does not affect current retirees and those nearing retirement-benefits for those now 55 or older would be untouched. Neither would it increase the retirement age above current law, increase payroll taxes or reduce annual cost-of-living adjustments (COLAs), now or in the future.
We save Social Security by making two fundamental changes to the system for those now under 55. First, this plan changes the way first-time benefits will be calculated. These benefits now rise with overall wage growth. Under my plan, growth in initial benefits would be linked to the consumer price index. Initial benefits would still rise over time, only at a slower rate. Instead of rising 20 times over the next 75 years, they will increase by a factor of 10.
Switching from wage indexing to price indexing will eliminate the unfunded liability of the Social Security system and allow us to avoid increasing the payroll tax for young workers. At the same time, future workers could count on receiving their benefits.
Second, workers currently contribute 6.2% of their wages to Social Security. My proposal allows workers under 55 the option of establishing their own personal savings accounts. Contributions into these accounts would range from 3.5% of wages for low income workers to 1% for those at high income levels. Workers who choose to contribute to these accounts would have a variety of investment options and could withdraw proceeds upon retirement. But as they will be paying less into Social Security, their Social Security benefit will be slightly reduced. The basic Social Security benefit will be reduced by 25 cents on the dollar for each dollar they receive from their personal savings account.
Nonetheless, the private investment account option should offer most recipients the opportunity for greater returns than Social Security alone could generate.
Yes, we are asking some in the baby boom generation to insure the solvency of Social Security by making a sacrifice in terms of accepting a slightly lower initial benefit. An average 45-year-old male, for example, would receive about 1.7% less under my plan, but look what happens in return. First, he is assured of receiving benefits because the solvency of Social Security is assured. More important, his children will receive far more in benefits. Under my plan a 25-year-old male who takes advantage of the personal savings account option should receive 19% more in benefits than promised under the existing system, based on historical averages for conservative investments.
Today’s retirees and those nearing retirement will receive their benefits just as they expected. Younger workers can not only count on receiving benefits, they will not have to worry about the prospect of working longer hours and paying increased payroll taxes that would otherwise be needed to keep the current system afloat. If they take advantage of the personal savings account option, they’ll have more control over their own retirement resources and the opportunity for greater overall benefits than under our current Social Security system-even if it could pay all their promised benefits.
Finally, and most important, my plan is honest and realistic. The problems facing Social Security have built up for so long and become so mammoth that everyone must realize they cannot just be wished away. This plan makes clear the costs and benefits, and it avoids false promises.
If we are truly concerned about saving Social Security, there is no better plan than this one and no better time to start than today. If we face the challenge now, we can provide for our retirement security without sacrificing our children’s and grandchildren’s standard of living.