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One Man's Approach to Social Security Reform

Defined contribution plans have become a popular retirement savings vehicle for millions of working Americans. Sam Beard thinks the concept behind them could help rescue the nation's Social Security system, too.

The founder and president of Economic Security 2000, a non-profit educational organization, Beard also serves on the President's Commission to Strengthen Social Security—a bipartisan group that President Bush created in May 2001 to recommend ways to put Social Security back on sound financial footing.

Addressing the SVIA Forum, Beard said it was his view—he made it clear that he was not speaking for the President's Commission—that the country can no longer afford the defined benefit promise held out by the current Social Security system. He noted that in 1935, the year that the Social Security Act was signed into law, the U.S. had 40 workers, and their tax dollars, supporting every retiree covered by the new government pension plan. By 1997 there were only three workers for each retiree, and by 2030 he predicts we will have fewer than two workers per retiree.

Cutting Social Security benefits and simultaneously raising Social Security payroll taxes would be one way to restore solvency to the system, Beard said, but not an attractive one; the necessary tax increase would be onerous, and millions of seniors would be forced to live below the poverty level. Privatizing Social Security is another unpalatable option, he said, since it could leave millions of retired Americans financially destitute if their self-directed investment programs soured.

A better solution, Beard argued, would be to simultaneously shrink the defined benefit promise of Social Security and add a defined-contribution component to the program. Under that new component, each working American would have the opportunity to set aside $1,000 per year in a personal retirement account, with some of the money contributed by the government and some by the worker.

Because most Americans know little about investing and because this is a safety-net type of retirement plan, Beard said, the accounts would have to be managed conservatively, albeit not as conservatively as the current Social Security system. Rather than allow individuals to manage the plans as they see fit, the way most do now in 401(k) programs, he said the Social Security accounts should be managed by carefully screened institutional investment firms. "People could choose their managers, but the managers would then run huge, collective, diversified pools of money," Beard said.

Distribution options would also be carefully controlled, Beard said, so that a retiree couldn't waste a life's worth of Social Security savings on, say, a new boat. "You couldn't take the money and run," he said. "This money should be thought of as a trust fund that you draw down at a rate of maybe 5% a year, which will for the most part keep your principal intact, and then that principal would go to your kids. Or perhaps you buy an annuity, or do something in the middle—buy an annuity with half the money, and draw down 5% of the remainder per year."

Beard said the system he's described isn't without precedent. Chile, he said, set up a U.S.-style retirement system before the U.S., and embraced the defined contribution concept about 20 years ago. In fact, he added, about 40 countries now have government-sponsored defined contribution retirement systems, all in response to the same sort of demographic trends that have weakened the current U.S. system.

While conceding that nobody thinks Social Security can be reformed overnight, Beard seemed genuinely optimistic that its problems will, ultimately, be resolved.

"Most big ideas to change in this country take 10 to 20 years to take hold," Beard said. "In 1980, our political leaders began warning that the entitlement system was going broke. We're now 20 years down the road. And while the number one agenda item in this country is now terrorism, it's also true that the person most excited about Social Security reform in this country just happens to be the President of the United States."

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