Mr. Chairman and members of the Subcommittee. I am Tom Miller, Director of Economic Policy Studies for the Competitive Enterprise Institute. This subcommittee's hearing on how payroll tax revenue collected under the OASDI programs is subsequently managed and invested focuses on a key ingredient in ensuring the ability of those programs to meet their future promises to millions of Americans.
Eleven years after the last major reform of Social Security finances, we are back at a crossroads in Social Security policy. The mounting paper surpluses in the system's OASDI trust funds will be squandered and lost unless they can be saved for their original purpose. The apparent policy contradiction we must resolve is how to build up sufficient Social Security reserve funds for the future, but prevent further political manipulation of these funds. Today, we remain caught on a treadmill in which seductive promises of the past are to be paid by others in higher and higher taxes tomorrow. Leaving the status quo unchanged will set up an unattractive menu of policy choices to be made in the not-too-distant future. The later that necessary adjustments occur, the more drastic and extreme they will be. We need to find a private-sector-oriented escape key from the chain-letter handcuffs of Social Security. The trick is to commit at least the same level of resources to the political objective of retirement security, but invest those funds more wisely through voluntary, market-driven means and get more bang for our bucks.
My written testimony summarizes how a Personal Security reform program might operate. It would allow future retirees to gradually turn an increasing share of their payroll taxes into personal savings opportunities that capture higher rates of return in the private sector. Once conversion of the projected payroll tax surplus was well underway, workers could be offered another option: they could redirect additional amounts of their payroll taxes into personal savings and investment accounts—in exchange for offsetting actuarial reductions in their future claims under the Social Security retirement program.
Any market-oriented overhaul of Social Security should respect the following guiding principles:
Each generation of workers should pay over time for as much of its own future retirement benefits as possible, rather than passing bills on to future generations. The first step on the long road to intergenerational equity is to encourage individual workers to invest today for their own retirement tomorrow.
Although we cannot avoid the transitional double payment burden of fully funding OASDI in this manner, we can make it more manageable by both starting the process sooner and stretching it out longer.
In making the transition from a tax-funded to a savings-financed retirement system, individual workers should be allowed to set the pace of change once new options are presented to them, with the assurance that past promises will be honored and Americans who cannot provide for themselves will not be left behind.
Regarding objections and anxieties about such an approach, I would point out that the current system suffers from periodic funding crises that have been, and will increasingly be met, by steadily rising tax rates that kill jobs and reduce economic growth rates. Moreover, under the current system, different classes of retirees already receive different rates of return on their original payroll tax payments according to their income level, marital status, longevity, race and age.
As our population ages and life spans lengthen, we can no longer afford to provide for our retirement needs primarily by means of the same old intergenerational chain letter. A simple return to pay-as-you-go financing would leave in place a gigantic benefits program headed for a crash two to three decades ahead without any prospect for serious reform.
Nor can we afford to continue raising taxes under false pretenses, while leaving future generations of retirees at risk.
If we started to put individual Americans back in control of their own retirement savings, future generations would be empowered to rely less on the future tax collecting ability of the federal government and more on investments in real economic growth within the private sector.
We can save and be independent, or be taxed and remain dependent. We'll be cheating ourselves if we pass up the chance to convert the controversial Social Security "surplus" into a down payment on retirement policy reform, financial stability, economic growth, personal independence and individual empowerment.