THE BLOG
11/13/2012 06:42 pm ET Updated Jan 13, 2013

Paul Ryan's Trojan Horse: How to Gut Social Security

Doubtless changes in Social Security will be part of the "Grand Bargain" that will be proposed in the next week to step back from the Jan. 1 "fiscal cliff." A likely compromise proposal from the Republicans will be to give on tax increases, but insist in return on the "private accounts" idea advocated by Paul Ryan over the years. It is important that the president and Congress understand the significance of that proposal.

Paul Ryan's mentor, Ayn Rand, hated Social Security and he himself, in a speech to Rand's "Atlas Society" in 2006, called Social Security a "collectivist and socialist" system. Yet he knows that proposing direct elimination of the system is a political non-starter. So he created a Trojan Horse proposal called 'private accounts" that would achieve exactly what he and his mentor hope for, all in the name of saving the system.

Since FDR introduced Social Security, the fundamental goals were to reduce old-age poverty in America (in which it has been extraordinarily successful) and to create a safety net for those who are at risk of poverty because of failure of their support system -- like orphaned children.

How would Ryan's proposal -- which was part of the Republican Party's platform in 2012 -- frustrate these goals?

First, and most powerfully, the private accounts would eliminate any progressiveness in the benefit structure, leaving virtually all of the seniors in Romney's "47 percent" in poverty. Secondly, they would virtually eliminate elements of the safety net like orphans' benefits (which the teenaged Ryan received when his father died) and benefits to women who take care of families over most of their best employment years or who have been very low earners.

And yet most ironically, at the same time, the private accounts would increase the overall size of Social Security by creating a new major entitlement, an "estate" benefit for workers who participate in the system but die early, leaving no dependent spouses or children.

The "private accounts" issue sharply distinguishes the Republican approach from any of the other ways that have been discussed to make the system sustainable without destroying its fundamental purposes.

How would private accounts work and frustrate the anti-poverty and safety net goals?

Private accounts would have the simple structure of a 401(k) plan. Existing FICA taxes would be paid into an account each year and accumulated with whatever investment income the account earned. Proponents of the accounts say they would do very well with equity investments and critics point out the riskiness of investments in stocks. These arguments miss the main point of why private accounts have no place in our Social Security system.

Consider the low-income worker. Social Security since its beginning has had a steeply progressive benefit schedule. The lifetime average earnings of the worker are computed and the monthly benefit ranges from 90 percent of the lowest bracket to 32 percent of the middle to 15 percent of the excess. No such scaling can be applied to a private account because as practical matter everyone would have to use the same payout rate for each $1,000 in the account. As the accounts mature, the higher income workers will have substantially greater incomes and the low income workers will be paid much less. In short, there will be no progressivism.

Consider the widow and children of a worker dying young. Social Security provides significant monthly benefits for such children. Benefits also go the non employed spouse until the last child turns 18. The total amounts are significant: $19.7 billion paid in 2010. Such benefits would be a small fraction under a private account system. The young father's private account, upon his early death, would still be quite small and would need to provide the children's as well as the widow's childcare and retirement benefits. The payouts would be a small fraction of the current benefits.

Consider the stay-at home mom. Under the present system each lower-earning spouse receives at least 50 percent of the higher earning spouse's benefit. Accordingly, in the extreme, a stay-at-home mom and a full-time working spouse with no child-care time off get exactly the same benefit. Under a private account system there would be no account and no benefit for the time the mother spent raising children.

So much for the end of progressivism and safety nets.

However, private accounts, while taking away the three re-distributions, would also create a very significant and costly new benefit. Under the present system, if a worker dies without reaching retirement and with no spouse and no children, there is nothing paid.

Consider a 60-year-old worker with a long credited service and an average income of roughly the maximum $110,100 wage base in 2012. Each year the full 12.6 percent combined tax would have gone into her account, or $13,872.60, and, under the private account system, would have accumulated, with investment income, over her working career. Should such a worker die without dependents before receiving retirement benefits her account might easily have reached $1 million and, under a private account system, would be paid to someone according to the worker's preference. In this example the $1 million dollar "estate" would be an additional benefit and cost to the Social Security system, yet fulfilling none of the basic purposes of the system.

Take a look inside the Republicans' Trojan Horse gift. It is gift to higher income, long lived workers. That gift is financed by reducing the incomes in retirement of low income workers, by eliminating most of the benefits supporting widows and orphans, and finally by reducing the incomes of women who take time out of their paid working careers to care for children.

I think most Americans, including most Republicans, would reject the Trojan Horse gift if they knew what was inside it. But Ayn Rand would have been proud of her ingenious acolyte.

Subscribe to the Politics email.
How will Trump’s administration impact you?