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Add-On Accounts Add No Value
By The New York Times
March 26, 2005
The latest trial balloon in the Social Security battle is something called "add-on accounts." Touted as a possible compromise between friends and foes of privatization, they would be like souped-up I.R.A.'s - subsidized savings accounts intended to supplement government-guaranteed Social Security benefits, not to reduce or replace them.
Add-ons appeal to some lawmakers who reject President Bush's privatization idea yet want to look as if they're doing something. But Social Security loyalists warn that add-ons would be the first step in dismantling the system, while ardent privatizers turn thumbs down because such accounts would leave the current system intact.
Both sides are right about one thing: add-on accounts are a bad idea. But their objections miss the most important point. Like the Bush privatization plan, this hybrid does nothing to address the real problem: over the next 75 years, Social Security comes up short by $4 trillion. The only way to close that gap is to raise taxes or cut benefits, or both. A fair and adequate fix would include some of each, phased in over decades. By spreading the burden widely and slowly, the cost would not be unduly heavy for anyone and could be distributed in ways that reflect various groups' fair share of Social Security's shortfall.
Add-on accounts would be expensive in and of themselves, with the government providing incentives for people to contribute, like a match or a tax write-off. How would that fit into a Social Security rescue? Advocates have been somewhat vague. One approach that has been talked about would close the entire Social Security shortfall with a huge future benefit cut on high earners, while offering the tax-subsidized add-on accounts as the "sweetener" to make the outsized benefit cut easier to swallow. Lower-income workers could also open add-ons, though they would be less likely to feel they could afford to do so. The accounts' real purpose would be to offset the pain of the deep, high-end benefit cut.
Forcing high earners to bear the full cost of strengthening Social Security would be unfair and unwise. They must be part of the solution - perhaps bearing half of the sacrifice - but as a group they are not responsible for all of Social Security's financial problems. There is also a political consideration. Making high earners pay much more than their fair share could weaken their support for Social Security, which relies on widespread acceptance for its long-term survival.
Of course, the "sweetener" rationale disappears if top earners are not made to carry a disproportionate share of Social Security's reform. That brings us to our next objection: add-ons are an overly complicated way to raise retirement savings outside of Social Security. Half the work force already has access to 401(k)'s, but most people don't use them fully. There are relatively easy ways to help them save more. For instance, research shows that 401(k) participation skyrockets, especially among young and low-income workers, if employees are automatically enrolled. Employees would be free to opt out, but most do not do so once they're in.
Another good way to boost savings outside of Social Security would be to resurrect the Bush administration's stillborn plan to allow workers to split their tax refunds between a checking account and an I.R.A.
The discussion about add-ons is valuable because it furthers a dialogue about retirement security in general, with Social Security as one part. In so doing, it serves as a reminder that simply killing the president's privatization plan won't be enough.
The country needs to strengthen Social Security's finances with a long-term, progressive package of tax and benefit reforms and - separate from that - make it truly easier to save for retirement. Good ideas for accomplishing both of those goals are already out there, waiting only for politicians who are courageous enough to champion them.
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