Reducing Government Consumption, Increasing Personal Wealth: Limiting Federal Spending Growth Through Large Personal Retirement Accounts
by Lawrence A. Hunter on 07/14/2004
31 Pages
The congressional budgeting process is dysfunctional. The two characteristics of real budgeting are absent: binding budget constraints and enforceable spending priorities. As a consequence, federal spending is projected to consume nearly a third of the nation’s output at mid-century.
The big idea to remedy the situation is to allow workers to invest a large portion of their Social Security contributions in personal retirement accounts.
Personal accounts are typically presented in the context of the financial security they would bring to America’s workers during their retirement. But an additional benefit would be that fiscal discipline would finally come to the U.S. Congress.
Large accounts would provide a built-in mechanism to control federal spending, pay off the national debt, eliminate the long-run unfunded liability of Social Security, keep the trust funds perpetually solvent, and boost economic growth.
Four main principles would guide the design of personal-accounts legislation:
- Make personal retirement accounts large enough—at least half the payroll tax (6.2 percentage points);
- No future benefit cuts;
- No tax increases; and
- Finance the transition through federal spending-growth restraint, federal borrowing and the increased tax revenues produced by the higher economic output that such accounts and additional tax reform would produce.
The only extant legislative proposal that meets these principles is the “Social Security Personal Savings and Prosperity Act of 2004” recently introduced by Congressman Paul Ryan (R-WS) and Senator John Sununu (R-NH), which is patterned after the “Progressive Proposal for Social Security Personal Accounts” plan described in IPI Policy Report # 176 (PPAP). The Chief Actuary of the Social Security Administration has scored the PPAP proposal as “actuarially sound” based on the assumptions that federal spending growth is limited sufficiently and that increased national saving will generate additional tax revenue earmarked to finance the transition.
The proposal’s spending growth speed limit would lower the growth path of overall federal spending by slowing its long-run growth rate about 1.5 percentage points a year from what CBO currently projects. Over the long term, surpluses would emerge and all of the transition debt would be paid off so that the net decrease in government consumption is twice the amount of transition borrowing.
If Congress failed to reduce other federal spending growth sufficiently to compensate for the general-fund transfer to Social Security, it would be forced to enact a tax increase or deficit spend. Every worker in America would have an incentive to pressure Congress to reduce spending growth because every dollar of reduced federal spending would go directly into their personal retirement accounts.
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