Senate Opens Hearings on Social Security Reform as Top Republican Questions Private Accounts

The U.S. Senate Finance Committee is scheduled to open hearings on Social Security Reform today. The hearing will feature Robert Pozen of MFS Investment Management, who has proposed "progressive indexing" of benefits; Peter Orszag, a Clinton administration official who opposes private accounts; Peter Ferrara of the Free Enterprise Fund, who supports private accounts; Michael Tanner of the Cato Institute, who supports private accounts; and Joan Entmacher of the National Women’s Law Center, who opposes private accounts and cautioned against benefit cuts.

The central issue in the hearing and the general debate around Social Security reform is the president’s proposal which would let younger workers invest in private accounts income equivalent to 4 percentage points of their 6.2 percent Social Security payroll tax. The president concluded a 60-day campaign to promote his privatization proposal today in Galveston, Texas. The president is gambling that private accounts will cushion the blow of future benefit cuts by creating an alternate stream of income that might benefit from compounding interest or higher rates of return.

The hearing comes hours after the panel’s leading Republican, Sen. Charles Grassley (R-Iowa) said that the issue of private investment won’t solve the problem of keeping Social Security afloat. The president himself has recently conceded, according to CNN,

that individual investment accounts do not by themselves address the solvency issue.

According to the Associate Press:

The program [Social Security] currently takes in more in payroll taxes than it pays out in benefits to about 47 million recipients, including retirees, the disabled and survivors. That trend is projected to end in 2017, after the baby boom generation has begun retiring. By 2041, the system will have exhausted a trust fund built up to continue paying full retiree benefits. Then, according to program analysts, payroll taxes will be able to cover only about 72 percent of promised benefits.

Privatization is unlikely to succeed. Even if it does, there are far greater issues to address. According to CNN,

To address solvency, Bush has said he will consider many options, including raising the retirement age, lifting the amount of payroll earnings subject to Social Security tax and adjusting the formula used to calculate benefits.

Real Social Security reform will address the long-term solvency of the program. The Bush proposal to create private accounts does nothing to ensure the long-term viability of Social Security. Further private accounts are not guaranteed to generate returns greater than that of the current program, which would lead to benefit cuts beyond those needed if the current program was to remain in place.