Blended System for Social Security is Best Alternative to Status Quo Despite Some Unclear Parts, Overall Sound Plan
By Andrea D. Hicks, 02.18.05

During the 2005 State of the Union Address, President George W. Bush laid out his proposal to save Social Security from its impending doom. Urging Americans to step forward with courage and honesty, Bush emphasized the need for an immediate and worker-friendly approach to reform.

Although a CNN.com poll conducted after the speech found that 55 percent of adult respondents still consider personal investment accounts a “bad idea,” Bush’s plan is solid and the best solution available to tackle the problem in a timely manner.

If Bush and the rest of America are serious about protecting Social Security, people must work towards fixing this problem soon. Pretending that the system cannot or will not collapse does not bring hope to a parent of a five-year-old worrying about paying for college tuition. It will not comfort a parent with a 20-year-old child who may lose Social Security benefits if the system collapses.

The longer America waits to take action, the more difficult and expensive the changes will become. Americans in the 21st Century are living longer and drawing benefits longer, while the number of people paying into the system is not increasing proportionately.

“Instead of 16 workers paying in for every beneficiary,” Bush said, “right now it’s only three workers.” Thirteen years from now, Social Security will pay out more than it takes in, and by 2042, “the entire system would be exhausted and bankrupt,” he said.

Even though workers 55 and older need not worry about losing Social Security benefits, a lack of change will affect their children and grandchildren. So a plan that strengthens Social Security should be a plan for all Americans to embrace. Twiddling our thumbs and doing nothing would cost children and grandchildren an estimated $10.4 billion, according to Social Security trustees.

If steps are not taken to avert bankruptcy, the only solution will be “dramatically higher taxes, massive borrowing, or sudden and severe cuts in Social Security benefits or other government problems,” Bush said.

With the above statement as the alternative, Bush’s solution becomes even more appealing. And it should. Bush’s plan was not drawn up in a day. Instead, it is an issue that he has grappled with way before his presidency. For example, 16 years ago when Bush was the governor of Texas he met with Jose Piňera, the creator of the world’s first privatized pension plan.

Drawing on the Chilean system as a model, and perhaps other similar systems in Latin America and Sweden, Bush’s solution would not force workers to invest in a personal account. Instead, it would be a personal choice. Workers could choose to rely solely on benefits from the general Social Security fund.

Unlike the Chilean plan, which requires all salaried workers who entered the workforce after 1981 to contribute to a personal investment account, Bush’s plan would give workers an opportunity help pay for those already retired by putting a percentage of their incomes into Social Security. It would also set up another account that the individual could draw from once he/she retires.

Although the U.S. personal investment account idea draws partly from the Chilean model, it is important to note that keeping the general Social Security fund might be a safe move. Just look at Chile: “Investment accounts of [Chilean] retirees are much smaller than originally predicted—so low that 41 percent of all those eligible to collect pensions still work,” said Stephen J. Kay of the Federal Reserve Bank of Atlanta in an online commentary. Under Bush’s blended system proposal, retirees still would draw from the general fund in addition to the personal investment account.

Some critics are concerned that Bush is not giving choice or control to the people, since workers will choose among five government approved funds in which to invest their money. Is this really something to complain about? Aren’t five choices plenty?

Look at Sweden as an example. Similar to Bush’s proposed plan, Sweden already has a blended system. Some may say too many choices does not necessarily work. When the Swedish plan was first introduced, workers had 465 funds from which to choose; now it’s up to 600. The result?

“In Sweden too many options paralyzed individuals from making a choice,” said Alan B. Krueger in the article “Lessons from Sweden.”

Since 2000, 92 percent of new workers were added into a default fund because they did not make a choice. If we ask the American government to give us limitless choices for our personal investment accounts, then we too may become overwhelmed and subsequently fail to make use of our ability to choose.

Another concern critics point out is that Bush has not really defined a clear plan for those who choose against a personal investment account. A generic answer from a recent White House press release explained that: “A worker who decides against taking a personal account might get $15,000 annually in benefits from the traditional system, reformed to be permanently sustainable.” Is that the same level of benefits retirees expect today? Does anyone else find the phrase “permanently sustainable” a bit ambiguous?

This part of Bush’s plan is by far the area of most concern. Congress must clearly define how Bush will keep traditional Social Security “permanently sustainable” before it becomes law. Otherwise, people may feel pressured into personal investment accounts because they don’t know whether or not the president has a solidified plan for those who choose against it. Of course, most of us would agree that personal investment accounts are designed to benefit the worker.

Besides, if the personal investment account does pan out and can be clearly defined as the best way to earn the most money for retirement, why not do both? If Federal workers can already invest five percent of their paychecks into one of five investment funds, plus draw Social Security, we should too.

But most importantly America must remember and act upon what the president asserted in his speech: “We must make Social Security permanently sound, not leave the task for another day.”