On Social Security reform, the daring policy is best

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On Social Security reform, the daring policy is best

By Newt Gingrich and Peter Ferrara

History is repeating itself. The same so-called "experts" who were wrong about President Reagan's tax cuts are now wrong about personal Social Security accounts.

Many bond-market analysts were opposed to Reagan's 1981 tax cuts because they feared massively increased deficits. They argued such deficits would swamp the bond markets with federal debt, causing interest rates to soar and further weaken the economy.

Just the opposite happened. Interest rates fell throughout the 1980s, and the Reagan tax cuts produced one of the greatest booms in American history.

Today, bond-market savants are raising similar questions about allowing workers a personal savings account option for Social Security. They argue that the government would have to issue trillions of dollars in transitional debt to cover promised benefits to today's retirees while workers pay part of their payroll taxes into their personal retirement savings accounts. That debt, they again argue, would cause interest rates to soar, tanking the economy.

What these pessimists ignore is that the personal retirement savings accounts would guarantee huge sums in new investment funds moving into the markets as workers buy bonds and stocks for their accounts.

Consider the Social Security reform bill introduced by Rep. Paul Ryan (R-Wis.) and Sen. John Sununu (R-N.H.). The American Shareholders Association estimates that, under the Ryan-Sununu personal retirement savings account plan, if workers invested half their savings in bonds and the other half in stocks $85 billion would flow into the bond markets in the very first year alone. An increase of this size would double current annual investment flows into corporate bonds.

Moreover, the chief actuary of Social Security estimates that, after the first 15 years of personal savings under Ryan-Sununu, workers would have accumulated $7.8 trillion in today's dollars in their personal retirement savings accounts, which is roughly the same amount invested in the entire mutual-fund industry today.

After the first 25 years of personal savings under Ryan-Sununu, the chief actuary estimates, workers would have accumulated $16.6 trillion in today's dollars in their accounts. Yet, under the policies specified in Ryan-Sununu, the government would have issued only $1.25 trillion in new federal bonds at that point. Even that would be paid off during the following 15 years by the surpluses that would then be generated by the reform, according to the chief actuary's official score of the proposal.

All those funds from personal retirement savings accounts invested in the capital markets will substantially increase the demand for bonds and, almost certainly, reduce interest rates, not increase them. The new capital would also significantly increase wage growth by giving American workers the most modern technology, the best tools and the best financing for startups in the world.

Bond-market analysts wedded to historically failed economic models are telling the president that to save the economy he needs to propose massive reductions in future promised Social Security benefits. They want the president to change the calculation of Social Security benefits to reduce future Social Security payments. Their proposal is both unnecessary and politically undoable.

Even under the current benefits formula, the redistributive, pay-as-you-go, non-invested Social Security system pays very low, below-market returns, zero or even negative for many workers. If benefits are cut, all workers will be driven into negative returns that only get more negative every year into the future.

This new benefit-cut proposal is politically indefensible.

The official score of the Ryan-Sununu plan by the chief actuary of Social Security shows that large personal accounts equal to about half the total Social Security payroll tax would eventually shift all Social Security liabilities for retirement benefits to the accounts, where workers would get much better benefits than promised by Social Security today. This would eliminate all Social Security financing problems permanently.

The president should propose large personal accounts with the goal of eventually phasing in the full Ryan-Sununu plan and forget about any cuts in future promised Social Security benefits. This would ultimately solve all the problems of Social Security and, in the process, provide enormous gains for working people, as well as the capital markets.

Former Speaker of the House Gingrich is the author of Winning the Future: A 21st Century Contract with America (Regnery). Ferrara is a senior fellow at the Institute for Policy Innovation and a senior adviser to the Free Enterprise Fund.