V I E W P O I N T

The Thompson Social Security Privatization Plan Same Song, Different Verse

Presidential candidate Fred Thompson's Social Security plan is merely President Bush's discredited privatization plan with a few extra bells and whistles. Like the Bush plan, candidate Thompson's plan would:

• Divert money out of Social Security and into private accounts.
• Make huge cuts in Social Security benefits.
• Increase the public debt by trillions of dollars.
• Shift risk to individual retirees.

Candidate Thompson's plan would go beyond the President's plan in several ways. It would:

• Make larger reductions in Social Security benefits by completely indexing benefits to prices rather than using a combination of wages and prices, which purports to protect Americans at the lower end of the wage scale.
• Raise the Social Security retirement age for those with private accounts, effectively reducing their Social Security benefits further.
• Require workers, through an automatic but reversible wage reduction, to contribute 2 percent of their wages to a private investment account.

Here is how the Thompson plan would work. Workers would be required to contribute an additional tax of 2 percent of their wages into a private account through an automatic wage reduction. The automatic contribution could be reversed annually by action of the worker, but the plan assumes 100% participation. Considering the deep benefit cuts included in the Thompson plan, such an assumption would not be unreasonable as workers attempt to recoup some portion of the loss of their guaranteed benefits.

Like the Bush privatization plan, candidate Thompson's plan would divert money out of Social Security into private accounts. In his plan the diversion is called a "matching" contribution and would equal about 1 to 5 percent of earnings, depending on the level of the individual's wages. This would leave Social Security with less income than it currently has to pay benefits. As with the Bush plan, candidate Thompson's private accounts, by themselves, would do nothing to improve solvency. In fact, they would make the funding gap larger and therefore require larger cuts in benefits.

To summarize, the Thompson plan results in the worst of both worlds. Social Security ends up with significantly lower revenues as roughly one-third of the individual's payroll tax is diverted into the private account in the form of the so-called "match". At the same time, the individual will pay an additional tax of 2% of wages into the private account and will end up with dramatically lower guaranteed Social Security benefits.

Like President Bush, candidate Thompson would reduce benefits for account holders. The Thompson plan would do this by raising the retirement age - a measure referred to in the plan as "delaying the retirement age" but which has the effect of reducing benefits. For young people just entering the workforce, this "delay" would amount to almost 7 years - resulting in a retirement age of nearly 74.

Like the Bush plan, the Thompson plan will likely cost trillions of dollars. In fact, the Thompson plan mandates a transfer of funds from the general revenues of the Treasury to Social Security, thereby increasing the publicly-held Federal debt to cover the costs of establishing these private investment accounts.

While President Bush endorsed a price indexing plan that would make dramatic cuts in Social Security benefits, the Thompson version of price indexing would result in even more severe cuts. The Bush plan moderates some of the most drastic cuts by attempting to protect low-wage workers and using a combination of price- and wage-indexing for middle-income workers. In contrast, the Thompson plan imposes full price indexing on all workers.

Despite candidate Thompson's claims, his price indexing plan would sharply reduce benefits for future retirees and would shrink benefits as a proportion of pre-retirement earnings for future generations. As a consequence, each new group of retirees would fall further and further behind the standard of living of the workers around them.

While candidate Thompson argues that private investment account balances would make up for cuts in Social Security benefits, those investment account returns would be highly risky. The Thompson plan assumes a rate of return on the private accounts that the Congressional Budget Office has rejected as unrealistic. In addition, there is no assurance that some individuals would not actually lose money. In contrast, Social Security benefits provide a guaranteed benefit that lasts as long as you live and provides an annual cost-of-living adjustment.

Under both the Bush plan and the Thompson plan, the risks of having a sound base of retirement income are shifted to the individual. The benefit cuts are so large that Social Security's protections are unraveled. Risky private investment accounts cannot adequately replace these protections and Social Security is effectively dismantled.

Government Relations and Policy, November 13, 2007