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Much Ado About Nothing: The Archer-Shaw Plan Won’t Fix Social Security—Viewpoints | EPI

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Opinion pieces and speeches by EPI staff and associates.

THIS PIECE ORIGINALLY APPEARED IN THE COLUMBUS DISPATCH ON MAY 21, 1999.

Much Ado About Nothing: The Archer-Shaw Plan Won’t Fix Social Security

By Edith Rasell

Can Social Security be “fixed” without cutting benefits or raising taxes? It would be some magic act if you could. But two veteran House Republican lawmakers on the powerful Ways and Means committee — Bill Archer of Texas and Clay Shaw of Florida — have offered a plan they say will do just that, plus guarantee benefits forever into the future.

The basic funding problem with Social Security is that we’re all living longer and we need to figure out a way to pay for spending more years in retirement. According to the Social Security Trustees’ 1999 report, fixing the program for the next 75 years would require adding a little over 2% of workers’ earnings into the program each year. Problem solved.

But this is Washington, and we have experienced political contortionists working on Social Security.

The Archer/Shaw plan calls for creating private individual retirement accounts to be funded initially by the Social Security budget surplus and later with tax dollars. Each year, 2% of workers’ taxable earnings would be deposited into their account — just about the same amount of money the Social Security Trustees say is needed to fix the program. Workers would set up their individual account with one of 50 mutual funds, each investing 60% in stock and 40% in corporate bonds, and could switch funds each year.

Not too complicated yet, but how does this fix Social Security?

It doesn’t. The Social Security actuaries who assessed the Archer/Shaw plan found that for “virtually all future beneficiaries” the private accounts would provide them with less income than they would have received from Social Security. But Archer and Shaw say this is not a problem since, under their plan, most beneficiaries will still end up receiving their standard Social Security benefits — no more, no less. (One group of seniors, those who continue to work and receive some income, could see increased benefits since Archer/Shaw would also eliminate the benefit reductions faced by some retirees with earnings — a change also supported by President Clinton). The way the plan works is that upon retirement, workers will surrender their individual accounts to Social Security in order to supplement the program. Huh?

When the smoke clears, this misguided plan promises to deliver nothing except added costs and confusion.

But the true hocus-pocus of the Archer/Shaw proposal comes in how they plan to bolster funds for Social Security. They assume that workers’ individual accounts will hold stocks, which pay higher returns than the bonds held by the Social Security trust fund, bringing greater funding for the program. Unfortunately, this hope is based on falsely high estimates of future stock market gains. Under more realistic projections, consistent with expected economic growth over the next 75 years, the Archer/Shaw plan will not even come close to a long-term fix for the program despite devoting an additional 2% of payroll to Social Security via individual accounts.

If the Republican leadership’s disappearing act around the Archer/Shaw plan is any indication of its prospects, then Social Security is safe for a while longer until we can find a better solution.

[ POSTED TO VIEWPOINTS ON JUNE 28 ]

Edith Rasell is an economist with the Economic Policy Institute. She is a former family physician and specializes in health care issues.