Herman Cain’s Retirement Proposal

Herman Cain has been busy lately touting his 9-9-9 tax plan, which I wrote about on Monday. He has countered criticisms that his plan is regressive by noting that the current 15.3% payroll tax (which applies to the first $106,800 of income) would be abolished—lowering the tax burden for the working class.

This analysis leaves many questions, the most important of which is the issue of paying for Social Security and Medicare—which the payroll tax currently funds. Mr. Cain’s apparent solution to this problem would be to gradually move away from Social Security towards the Chilean model where employers contribute a portion of their payroll to a private account. But this change would not solve the problems with the program.
 
In September, Mr. Cain had this to say about his proposed retirement system:

I believe in the Chilean model, where you give a personal retirement account option so we can move this aside from an entitlement society to an empowerment society. Chile had a broken system the way we did 30 years ago. A worker was paying 28 cents on a dollar into a broken system. They finally awakened and put in a system where the younger workers could—could have a choice—novel idea. Give them a choice with an account with their name on it and over time we would eliminate the current broken system that we have.

First of all, Mr. Cain gets a few details wrong about the Chilean system. In Chile, employees must contribute a portion of their earnings to these private accounts—there is nothing optional about the system. Also, Chile still spends significant public money on retirement: more than 2/3 of Chileans receive public support of some kind during their retirement.
 
More critically, Herman Cain’s plan does not address the actuarial shortfall in Social Security, which is currently estimated as $5 trillion of present value over the next 75 years. In his proposal, individuals would contribute to an account that would finance their own retirement. Who then would finance the monthly SS checks due to those already retired and about to retire? In 2010, the annual benefit payments for Social Security began to exceed its annual inflows for the first time.
 
Current benefits to those in retirement or about to retire will not be cut—that is a simple political reality. But simply adding these unfunded benefits to the deficit would be dangerous; it would increase the yearly deficit to more than 10% of GDP, which would be worse than the deficit in Greece.
 
Of course, Chile dealt with this problem simply. Their dictatorial regime paid the transition costs through fiscal austerity deeper than any mainstream American voice would advocate, and by selling off some nationalized industries. These are not practical options for the United States.
 
Instead, to reform Social Security, we need to keep its source of funding—the payroll tax—and modestly reduce the growth in benefits for wealthier individuals, as I proposed in 2005. By contrast, Mr. Cain’s plan would dramatically increase the short-term deficit while failing to address the cause of the shortfall.