May Be Wedge With Which To Finally Pry System Loose
Members of Congress who still think it’s politically risky to touch Social Security should go west to Oregon.
A grass roots Social Security reform movement is under way, and it begins in a state where “Rockefeller Republican” - which is to say “liberal” - is still regarded as a term of praise. In May 1997, the Oregon Legislature overwhelmingly passed a resolution calling on Congress to give the state a waiver that would let it opt out of the Social Security system and provide individual retirement savings accounts to its citizens. Not just to public employees - as was done in a few Texas counties in the early 1980s - but to every worker in the state.
Following the vote, the usually liberal Portland Oregonian newspaper gave the resolution a cautious thumbs up: “In its current incarnation, Social Security is headed toward insolvency, and it’s clear that Congress must do something soon. And if reform happens, Oregon - by declaring its willingness to forge ahead on its own - would be right to claim some of the credit.”
The idea for the Social Security opt-out was spearheaded by Oregon State Sen. Gene Derfler, R-Salem, a 73-year-old retired small-business man who is a Social Security recipient himself. Explaining his enthusiasm for the idea, Derfler said: “If you ask any young person if they expect to collect Social Security when they retire, most will say no. It is not a fair situation. The federal government is not going to address the problem - they have their head in the sand. The answer will have to come from the states, as it did on welfare reform. We would like to have the opportunity to implement a state plan.”
Randall Pozdena, a former Federal Reserve economist working for the Portland-based Cascade Policy Institute, has calculated several plausible scenarios for how a privatized system would work in Oregon. Pozdena favors placing each worker’s payroll taxes into an Oregon Private Retirement Account, which would funnel the money into stocks, bonds and other private investments likely to yield a higher return over time than the current Social Security system.
The idea of letting states opt out is forcing public officials to think hard about how the process of privatizing Social Security would work. Many of the problems that face individual states also would face the country if it privatizes Social Security. These include what to do about mid-career workers - who would have to make the transition from the government-run pension system to private savings - as well as how to pay for the benefits of existing Social Security recipients and those workers about to retire.
But the problems are not insurmountable. In Oregon, for example, Pozdena calculates that current Social Security benefits can be paid for by maintaining the employers’ share of the payroll tax for the next 23 years. Meanwhile, those enrolled in the new, privatized system could look forward to substantially higher retirement benefits than Social Security will offer.
Even assuming an extremely conservative 3 percent rate of return on their investments (the stock market’s historical average, including the years of the Great Depression, is 7 percent), individuals in the private system would enjoy benefits 10 percent more generous than those offered by Social Security. With a 5 percent rate of return (not far above the safest government securities available today), they would enjoy 50 percent more income than Social Security offers.
A number of issues still need to be resolved before a state opt-out plan can be considered realistic. For instance, what safeguards and restrictions on retirement savings investment will be necessary to prevent fraudulent or imprudent investment? And what happens to workers who move into or out of Oregon? Workers leaving the state might face the prospect of losing some of their retirement savings unless Oregon persuades Social Security to allow workers who leave the state to remain enrolled in Oregon’s plan.
Hypothetical problems aside, the opt-out strategy remains a good way for states to put pressure on Washington to fix Social Security. Following Oregon’s lead, several other states are thinking of passing their own opt-out resolutions.
Of course, real change won’t come easily. Even in Oregon, the state’s congressional delegation - while generally supportive of the opt-out - has declined to introduce the legislation needed to allow Oregon to complete the task.
What these lawmakers fail to grasp - indeed, what most of official Washington fails to grasp - is that the politics of Social Security reform are changing: If it used to be politically dangerous to talk about making changes to Social Security, the day is fast approaching when the danger will lie in keeping the program as it is.
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