Independence versus dependence, community versus individualism: these are the scenarios which often frame the ongoing debate over social security. John Cogan, a Hoover Fellow who served on President Bush’s Commission to Strengthen Social Security in 2001, argued in a talk sponsored by Stanford in Government that this abundance of divisive rhetoric did not have to be the case.

Cogan stated that much of the language surrounding the debate over social security reforms lay more in political power struggles than economic reasoning. He attempted to put the issues within a bipartisan context while explaining the massive liability that Social Security presents to future generations and the role of private accounts and benefit “reductions” in solving the looming Social Security crisis.Cogan turned to his experience with Democratic senator Daniel Patrick Moynihan to support his claim that Social Security is indeed a bipartisan issue. While on the President’s Social Security Commission in 2001, both Cogan and Moynihan supported private accounts but for vastly different reasons.

Cogan, as a conservative, supported the idea on the grounds that it gave individuals the opportunity to build wealth while offering choice and maintaining security. Moynihan, on the other hand, supported private accounts as a way of bridging the growing gap in wealth which had been accelerated by the creation of 401Ks and IRAs in the 1970s; both are programs which have benefited high income individuals to a greater extent than low income individuals. Cogan used this anecdote to demonstrate how conservative and liberal priorities concerning social security could be reconciled in favor of reforms such as private accounts.

He also pointed out that Sweden, which he called the “flagship of welfare states,” had adopted a similar Social Security system using private savings account.After establishing how reform fits into both conservative and liberal agendas, Cogan went into greater depth concerning the details of Social Security’s pending crisis and potential remedies. He emphasized that the current pay-as-you-go system does not save or invest taxpayers’ money for the future. Instead, current tax revenue goes to pay current Social Security recipients while surpluses spent on other government programs. Because surpluses are spent and not saved, Cogan said “All that is in the trust fund is IOUs,” leaving the Social Security system in “deep financial trouble.”

He stated that while the government is currently taking in $100 billion more than it pays out, social security will be running a $200 billion dollar deficit by 2025 and a $400 billion dollar deficit by 2045.He also argued that the current system of benefits offers recipients a “raw financial deal.” Under the current system, Cogan stated that today’s average forty-year-old would have to live to be eighty-seven (life expectancy in 2002 was seventy-seven years old) to receive everything they paid in social security taxes plus 3% interest.

Similarly, a forty-year-old college graduate, with higher lifetime earnings and thus taxes, would have to live to 104 and a twenty-year-old college graduate would have to live to be 124. Thus a twenty-year-old college grad and even a typical forty-year-old will receive a negative return on what they paid in taxes.On the other hand, creating private accounts, Cogan said, would actually reduce Social Security’s total liability while providing individuals with a better, if still not perfect, financial deal.

While the introduction of private accounts would eliminate current surpluses and even create short term deficits, the total (future and current) debt carried by the country would decrease. Private accounts would effectively bring future deficits to the present and allow current Social Security tax surpluses to reduce the system’s total liability by twenty percent rather than being squandered on other programs.

Cogan said that private accounts would also provide individuals with a better financial deal because stocks have historically averaged 9% returns (as opposed to returns under 3 % in the current system.) He noted that the President’s Commission in 2001 used the more modest figure of 6% growth when formulating its recommendation in favor of private accounts. Cogan also addressed concerns over administrative costs. According to him, individuals would be initially restricted to five index funds which were not actively managed and had administrative costs of 0.3%.

Even with the introduction of actively managed funds offering higher returns, the administrative cost would be a very small percentage and completely negated by the increase in the rate of returns.Cogan also briefly discussed the proposal to index Social Security benefits to inflation rather than growth in wages. Under the current system Social Security benefits increase at the same rate as wages, but in the United States, wages grow at a faster rate than prices and thus the purchasing power of benefits increase. Cogan, as the author of this proposal in Bush’s 2001 Commission, said that the change of indexes is often referred to as “benefit cuts,” but emphasized that such a change would not cut current benefits but would rather reduce promised future benefits to be inline with current benefits. Such a modification would not only single-handedly eliminate Social Security’s future liability, but would actually provide a small surplus.