Lamm Endorses Sweeping Changes in Social Security

Former Colorado Gov. Richard D. Lamm, who is nearing a decision on whether to mount a third-party bid for the presidency, Friday endorsed a plan to gradually replace Social Security with mandatory individual retirement accounts.

The sweeping proposal, which would fundamentally revamp a program most politicians consider dangerous to discuss at all, offered early evidence of the provocateur’s role Lamm might play in the presidential race if he decides to seek the nomination of the Reform Party founded by Ross Perot.

In a speech to a Washington conference, Lamm argued that the Social Security system needs basic changes before the nation’s 76 million baby boomers begin retiring early next century. “It needs to recognize the demographic tidal wave that is coming,” Lamm said.

Sponsors say that over the long term, the reform plan would mean greater retirement benefits for senior citizens and increased economic growth as the nation’s pool of savings increased.

But in the meantime, the plan could face enormous political resistance in part because it would simultaneously cut benefits for retirees while reducing take-home pay for workers during a transition period that would last roughly 35 years.

Currently--despite a widespread belief to the contrary--Social Security is structured in a pay-as-you-go fashion. Taxes from today’s workers essentially pay the benefits for today’s retirees. Critics of the system argue that maintaining it in the future will require untenably high taxes on workers as the baby boom retires over the next half-century.

Under Lamm’s proposal, all workers would be required to invest 5% of their earnings in retirement accounts dubbed Personal Thrift Accounts.

Individuals would be allowed to invest their funds in the stock market and other private markets, subject to some government regulation. Over time, the higher returns those investments historically have provided could fund greater retirement benefits for most workers, the plan’s authors argue.

Under the proposal, the government would subsidize contributions to the retirement accounts for low-income workers and continue to provide a “floor of protection” with payments that would ensure all retirees an income equal to the poverty level. As the new system phases in, the existing payroll taxes that now fund Social Security would eventually be reduced to the minimum needed to provide those subsidies for the poor.

But through approximately 2030, workers would face a double hit--paying the 7.65% payroll tax to fund the benefits of workers who retired under the old system while being required to set aside another 5% of their paychecks to fund their own retirements.

Supporters argue that while that prospect is unattractive, workers under the current system would inexorably face much higher payroll taxes to fund the benefits guaranteed under the existing system as the number of retirees increases over the next generation.

“You either have to add massively to the national debt [to pay benefits to existing retirees] or you have to have some generation pay for their own and another generation’s retirement,” Lamm said.