Considering the Texas Alternative to Social Security
Letter to the Editor

Regarding Merrill Matthews's Cross Country: "Perry Is Right: There Is a Texas Model for Fixing Social Security" (Cross Country, Sept. 24): In the 1980s, Galveston, Texas pulled its employees out of Social Security and set up an alternate plan based on individual accounts. As Mr. Matthews points out, this plan has generated higher returns and benefits than Social Security, seemingly pointing to a solution to Social Security's multi-trillion-dollar shortfalls.

But Mr. Matthews's arguments are ultimately a false promise. Social Security pays a low rate of return because it is a pay-as-you-go system, which transfers income from working individuals to beneficiaries. As a result, participants receive a rate of return equal to the growth of the wage base, rather than the higher returns available in the market.

Any given individual who leaves Social Security could likely do better on his own, but the loss of his taxes makes Social Security's funding problems worse. If a small group pulls out, like Galveston's employees, the system can make up the difference. But if everyone pulled out, Social Security instantly would face a $685 billion annual shortfall. Unless a reform plan addresses these transition costs, it won't produce any long-term gains. There's no free lunch.

Policy makers should not shy away from Social Security reform or personal accounts. But President Bush's failed reforms in 2005 showed that too many in Congress and in the country believed that personal accounts could painlessly fix Social Security's deficits, with support dropping once they realized this wasn't the case. Tax increases or benefit cuts are still needed. Those hoping for Social Security reform, including reforms based on individual savings accounts, should not make the same mistake again.

Andrew G. Biggs is a resident scholar at AEI

 

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