Social Security operates as a common rice bowl for one big, nationwide family. People contribute to it whenever they work in covered employment, in varying proportion to their wages. When the time comes to retire, what they get out of it depends upon circumstances. One circumstance (but only one) is how much they have put in. Other circumstances are the age at which they retire, how their contributions have compared with those of other people, whether they’re married or single, whether they still have dependents in the house, how long their most recent marriage lasted (if they haven’t remarried), how the economy was doing in the last year they worked, and how generous Congress is feeling.
As one approaches retirement age, one may begin to feel a certain curiosity: "How am I doing? How much will I be getting from Social Security?" The itch to know becomes intense if one toys with the idea of retiring early, or if one’s employer looks eager to downsize. Then one learns that the Social Security Administration has kept records. It will be glad to estimate your benefits, based on your employment history, your current circumstances, and the current rules. In a sense, this is a "personal account". When you actually do retire and apply for Social Security, they’ll interview you and probe a little more intensively for the relevant details, and maybe ask about gaps in the record (when you were unemployed, back in school, and so forth).
So the folks at Social Security do have records which could serve as the starting point for personal accounts. What they can’t tell you, though, is the current value of the assets which have been accumulated to back up what the accounts seemingly promise. That’s because none have been accumulated, or at least none have been earmarked and counted. Moreover, the promises are not firm commitments. The U.S. Supreme Court long ago ruled that the proceeds of the Social Security tax "are not earmarked in any way" and are a "non-contractual interest", not an accrued property right, of the individual worker. [21] In this sense, one’s Social Security records are not a personal account.
It would be a long stride forward to establish personal Social Security accounts. We should do this, whatever else we decide to do about Social Security, and should insist that the accounts provide a valuation of assets as well as prospective benefits.
Here’s why.
First, and above all, it would force our discussion of all other public issues into a new and neglected channel. If Social Security were obliged to identify assets undergirding its promises, any government activities in which the funds were invested would have to be scrutinized in a new light.
This is the "seed corn" question [22]: are the activities upon which we propose to spend public money a form of investment, maintaining and expanding next year’s production at the expense of immediate gratification, or are they expressions of current need alone? Mind you, sometimes it is necessary to eat the seed corn: there is such a thing in the world as times of famine. Even without a famine, a current generation may justly devote most of what it produces to its own enjoyment. A system like Social Security, though, which makes promises for the future, should constrain its promises according to the seed corn which it does set aside, and set aside seed corn according to what it has promised.
Looking at the U.S. retirement system as a whole, we can see in IRAs (Individual Retirement Accounts) one prototype of what we might like to see in personal Social Security accounts. (Our system is already a hybrid.) Each participant has an individual scoreboard. One can find out where one stands, and can investigate, if one wishes, the portfolio of assets. A whole industry is engaged in constant evaluation of those assets, and is prepared to furnish a quote at any moment, down to the last dollar. Of course, this is false precision; everyone knows what to think of day-to-day market fluctuations. The point, though, is that the shape of the future promised by one’s IRAs is as definite and accurate as human foresight can make it at any given time.
Individual Social Security accounts would, of course, have access to the same market-based information machine, to the extent that Social Security invested in the private sector of the economy. The part which it invests in government activities will be harder to evaluate. The effort to do so, however, will be good for the souls of everybody concerned: administrators, policy-makers, and the voters who send them all to Washington. Think of it as a new element in our "adversarial" system of government: one that stands watch over the economic interests of the future.
Personal Social Security accounts would also promote a subtle change in workers’ attitude towards their payroll taxes. Right now, Social Security taxes are just like anything else deducted from people’s pay: they never see the money, and nothing that they get for it is subject to their personal choice, so they don’t value it. Eventually they will value their Social Security benefits, but there is no close tie between those and what is deducted from paychecks today; what they value now is their take-home pay. (Tell the truth: would you go on strike for a "pay raise" with no increase in your paycheck?) Workers who could look in upon their Social Security savings and call them their very own would take a very different view of that part of their taxes.
In this regard, we could borrow a couple of really nifty ideas from the Chilean social security system, introduced when it was privatized. (Forget what you think of privatization, let alone what you think of the political auspices under which privatization took place in Chile. These little gems are questions of packaging, not substance — the difference which they make is educational. A nifty idea is a nifty idea.)
Idea number one: each worker covered by the system gets a personal "Pension Savings Account" passbook. The passbook can be stuck into a machine such as an ATM to render an immediate report of the worker’s accrued pension rights. It’s like money in the bank. José Piñera, who was the Minister of Labor and Social Security in Chile when the reform was introduced, gives a colorful account of workers standing in line at the ATM’s to see how their pension funds are doing. [23] This turns a tax into a part of their income, and the returns of the economy into a part of their wealth.
Idea number two: at the time the system was reformed, every employer was required to give each worker a raise equal to the "employer share" of the social security tax, and to increase the worker’s deduction for social security by that amount at the same time. After that, there was no "employer share"; the whole tax was attributed to the worker. Employers didn’t care: they wound up paying exactly the same. Workers didn’t care, either: they wound up receiving the same take-home pay. The only effect was educational: workers could see exactly what they were paying for social security.
Taken together, these two innovations clarify to workers what they’re getting and what they pay for it. What could be healthier for informed decision-making?
Foreseeably, too, puzzled passbook holders will find ways to verify the valuations in their accounts. Imagine an organization like the AARP (American Association of Retired People), or maybe a new one called AAFR (American Association of Future Retirees) minutely inspecting the Social Security system’s portfolio of government assets, to insure that they will truly produce the required growth. Voters would hear soon enough if some purported "investments" were blarney, or if some were not performing up to expectations.
"Passbooks", by the way, need not be the last development along this line. If and when privacy and security can be assured on the Internet, the Social Security system can furnish lots of information about the individual’s personal account. If we insist upon retaining the complicated, ad hoc rules for determining people’s benefits, interaction via a web browser may be the easiest way to investigate one’s own standing. One could enter any personal data which might be needed. (The system could even support "what if" investigations, similar to those for which people use spreadsheets.) Likewise, the more voluminous Social Security information about assets, resembling a shareholder’s report, may be most easily fetched in this manner.
With or without passbooks, personal Social Security accounts would pave the way to some major reforms that have little to do with the impending bankruptcy of the system, but are worth keeping in mind for their own sake. For example, take the question of marriage and divorce. In an era when divorce is almost as common as marriage, we might like for Social Security to be portable from marriage to marriage, as well as from job to job. This is much less of a problem, if each spouse has an individual account. Again, take the question of outside employment versus unpaid employment at home. We might arrange that spouses, so long as they remain married, pay into a shared personal account, but that in case of divorce, each is issued a new, separate account. The default would be a fifty-fifty split of assets accrued in the account since the time it became joint, but this could be negotiated or adjudicated according to circumstances (with, perhaps, some guidelines for attributing a "virtual wage", consonant with the couple’s total, to a partner who stayed home and provided child care, shopping, and all that). Note that it is the existence of personal accounts, with accrued pension rights held by the couple but divisible into separate portions, which makes this fine tuning possible.
A final advantage of personal Social Security accounts is that they facilitate some other changes, which I’ll take up under subsequent headings.
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