Hope For Social Security Reform in the Ferrara Plan

Posted: Oct 03, 2006 12:00 AM

The conservative movement, thank God, has been blessed with a number of people who quietly do excellent work advancing the cause. One such person is Peter Ferrara. For nearly thirty years Peter Ferrara has worked tirelessly on welfare reform, Medicare and Medicaid reform and Social Security reform, as author of SOCIAL SECURITY: THE INHERENT CONTRADICTION (1980), as consultant to several major think-tanks and as Director of the International Center for Law and Economics. Had his solutions been enacted years ago these programs would be on a sound basis instead of facing a looming crash of unimaginable proportions.

With the retirement of the baby boomers, Social Security is headed for a crisis which will lead to either stringent benefit cuts or a massive tax increase unless reforms are adopted.

Ferrara argues instead for a phase-in of private accounts. These accounts would be owned by the person to whom they are assigned; thus they could assist the potential retiree in accumulating wealth for his own retirement or to assist his family.

Under the Ferrara plan, Social Security recipients would be held harmless. If they did not want to switch to private accounts they would be guaranteed the benefits for which they are now eligible.

For those who elect to go the route of private accounts it would amount to a massive tax cut for the individual. Ferrara demonstrates how much better the market has done compared to the government-run Social Security program. It is remarkable, and it can be demonstrated. For a short time individuals working for non-profit institutions were allowed to opt out of Social Security. I know. I did it for a number of years. Workers for a mid-sized city in Texas also opted out. They formed the kind of private accounts for which Peter Ferrara argues. Over the past couple of decades these city workers now have individual accounts worth two and a half times what they would have had where they to have continued with the Social Security program. To put it simply money taken out of your payroll is not allowed to grow very much because you are paying for the benefits of others. You could have, within certain limits, control over your own account. You would not be permitted to invest in wild speculative projects but you would be able to grow your account as the market grows. If you are in a hurry for cash the stock market is the wrong place to be, with limited exceptions. However, if you invest in the stock and bond market your investment will grow significantly. Even those who were able to invest during the Great Depression (and I will grant you there were not many) were able to come out well ahead after a decade.

The Ferrara plan would allow workers to invest in private accounts a small amount at a time. Along the way, if one would go wobbly one could switch back to the current system and be guaranteed full benefits. If one compares what the current program pays (an average of $900 per month) to market-driven accounts when fully funded one would look at in all likelihood $3,500 a month vs. $900.

Advocacy of reform is supposedly the third rail of American politics. To touch the third rail of a heavy rail line in Boston, New York, Newark, Philadelphia, Baltimore, Washington, Atlanta, Miami, Chicago, Los Angeles or San Francisco while one is grounded means certain death. The liberals have sold the line for years that Social Security must remain untouched, lest the reform advocate die a sudden political death. But as the pollster John Zogby has pointed out, all of the advocates for reform won their elections in both 2002 and 2004. People are ready for reform.

Ferrara demonstrates that his plan will lock surpluses to be used to fund the transition to the private-account plan. Surpluses presently are used to fund all sorts of completely unrelated programs. What is left is a raft of IOUs in the Social Security account. Those IOUs must be funded by general revenues which simply are not there. As the Bush Administration has demonstrated with its tax reductions, cutting tax rates brings in more revenue, not less. Were the majority of people to own their own accounts it would amount to a huge tax cut. Finally Americans would be saving more money than they were spending.

Ferrara demonstrates in various advocacy papers for this kind of Social Security reform that families will come closer together because of it. Right now if I die my widow would not collect my Social Security even though I have worked for it most of my life. Under Peter's plan she would be able to inherit the account, which would be very helpful upon my demise.

One of the best aspects of the Ferrara plan is that it would eliminate the long-term deficit which the System now faces. Because Ferrara would hold harmless anyone who did not wish to make the switch I find no downside to his plan. The problem is the lack of will on the part of politicians.

President Bush, in the beginning of the 109th Congress, made an attempt at Social Security reform. His plan was anemic compared with the Ferrara plan, which is why he got nowhere with it. Depending upon the outcome of the elections, perhaps the Lame Duck President Bush and someone who ran on a Ferrara-type reform and won, someone such as Senator James DeMint (R-SC), would bite the bullet and step forward to work hard for these reforms. The wrong winning crowd would kill any such proposal. If the right crowd unexpectedly should hang on, this might be their opportunity to show some political courage. If that should happen we can thank Ferrara for hanging in there all these years.