Sunday, January 16, 2005

Who Wants to Be a Millionaire?

The New York Times
January 16, 2005

Who Wants to Be a Millionaire?

Pittsburgh — THIS is what we should do about Social Security: At the same time we acknowledge that it is the most successful domestic program in American history, we should also admit that Social Security, in its present form, is unsustainable. And then we should come up with a plan that is different than what President Bush and most of the pundits are proposing.

We should ask ourselves what would be a worthy aspiration for the financial security of retired Americans in the years ahead. My answer is that we should establish a process that will produce a substantial annuity for every American at retirement age.

By substantial, I mean at least $1 million. In order to create a real, fully financed annuity of this size, people must begin saving when they enter the work force. The saving needs to be continuous, and it needs to be left intact so that compound interest can work its magic.

We can do this. We already have a process in place that requires that we give the government 12.4 percent of our income in the name of Social Security.

The problem with the current arrangement is that our contributions are a tax, not savings. So we should begin by agreeing that we are going to require all Americans to save, individually, to provide for their financial security in old age. After all, if we don't save on our own for our retirement needs, who will do it for us? Our neighbors? Our children? In a civilized society we have a responsibility to take care of our own needs so as not to be a burden on others.

Yet we can also recognize that some people may work hard during their lifetimes, and save 12.4 percent of their income annually, and still not produce enough for a $1 million annuity when they retire. The federal government could then make annual, supplemental deposits to their accounts from its general revenues to make up the difference. Those of us who are more fortunate can help those who are not. (It is useful to remind ourselves that the federal government is "we the people" - and the federal government doesn't have any money unless it takes it from "us the people.")

Let me define what I mean by financial security. Financial security begins with ownership of real assets; so the money saved each year in this plan would be the property of the person who saved it. I would use the existing Social Security collection process because it is already in place, everyone understands it and its costs are relatively low.

The money would then be invested in broad-based index funds with an objective of matching the overall rate of return for all investments in the United States. These funds typically have very low costs because they're not actively managed. That means there would be no windfall profit for stockbrokers in this system.

Further to the definition of financial security: it means enough money in retirement for all needs - food, clothing, shelter - and including medical needs like prescription drugs.

If we could work toward this idea, we could reduce our current dependence on the political process for these necessities. When Congress passed and the president signed legislation last year expanding drug coverage in the Medicare program, many politicians acted as though they were granting us some great beneficence. But they don't have any money (or the benefits they pay for) to bestow unless they first take it away from us in taxes.

As I write this I can imagine the chorus of pundits saying, "This isn't politically possible." Why not? Because it is too complicated for people to understand? Or because the only way to approach change in our society is through small incremental steps, like the president's tepid notion of a limited, voluntary diversion of Social Security taxes into small private accounts?

Baloney, I say. What stands between a truly worthy aspiration for our society and its realization is political leadership with the courage to dream big.

The social policy technocrats will have a more legitimate concern: how do we get from where we are to this new and better condition? While I was secretary of the Treasury, the Federal Reserve chairman, Alan Greenspan, and I worked on an idea to jump-start the changeover by borrowing enough money to put money into individual accounts now, beginning with the youngest workers. We did some very rough calculations that showed for $1 trillion, we could transfer the population from age 18 to the mid-30's into this new arrangement.

The value of doing this is twofold. First, it hastens the transition to the new program for society overall. Second, the $1 trillion of borrowing now (to be paid from general revenues over the next 20 years) makes a substantial dent in the unfinanced liability of the current program.

As to the current program, everyone above the age of 35 could keep their current relationship with Social Security and their benefits intact. Their children, though, would have a better life. And that, after all, is the promise on which this nation has been built.

So there it is. Do we have political leaders who are interested in surpassing Franklin Roosevelt's achievement of 70 years ago?

Paul O'Neill was secretary of the Treasury from January 2001 to December 2002.