Editorial: Add-on accounts/A better fix for Social Security

05/27/2005

Star Tribune Editorial
May 27, 2005

In his campaign to revamp Social Security, President Bush could hardly have asked for a better ally than Robert Pozen, a former vice chairman at Fidelity Investments with an expert grasp of high finance. Pozen is an innovative thinker who developed the most useful tool Bush has brought to the debate. He also happens to be a Democrat who thinks his side should work with Republicans.

So we hope Bush was listening last week when the New England executive urged the president to adopt a new game plan and seek a solution that would supplement, rather than subvert, Social Security. (Pozen also urged congressional Democrats to be more flexible, though that advice didn’t get the headlines.) Bush should listen, not just because Pozen is right about the politics—the White House plan is dead on Capitol Hill—but because there are fairer, cheaper and simpler ways to improve the nation’s retirement system.

Pozen’s contribution to the Social Security debate is a concept called “progressive indexation.” He started with a Republican idea: indexing future Social Security benefits to prices, rather than wages, a step that would cut benefit payouts by billions of dollars. Then he gave it a progressive tilt by shielding low- and middle-income workers from the deepest benefit cuts. The result: Pozen would close about 70 percent of the financial gap facing Social Security over the next 75 years, while maintaining a retirement safety net for the poor. In a major development last month, Bush embraced progressive indexing as part of his Social Security plan.

The problem is that Bush’s plan still relies too heavily on benefit cuts. That explains why it faces stiff resistance on Capitol Hill and deep skepticism in the polls. If Congress adopted a balanced solvency package—by raising the cap on taxable earnings, for example—it could fix the solvency problem with smaller benefit cuts.

Last week Pozen gave the president even better advice: Drop the insistence on “carve out” accounts, private retirement accounts funded by diverting revenue out of Social Security. Instead, propose “add-on” accounts, retirement accounts built on top of Social Security. Congress could, for example, encourage workers to save more in existing retirement vehicles, such as IRAs and 401(k)s, by offering expanded tax credits.

The add-on approach has several advantages over the White House plan. It doesn’t drain revenue from Social Security, which already faces a serious funding gap. It doesn’t jeopardize Social Security’s fundamental role as an economic safety net. It doesn’t require a big new government investment bureaucracy. Finally, it would target incentives toward low- and middle-income workers who, as Pozen has demonstrated, are least likely to be saving for retirement now.

It’s not too late for Congress to pass a balanced and constructive change in retirement policy this year, one that addresses Social Security’s financial problems while helping Americans save more for old age. Add-on accounts, done properly, could be the solution.