Speeches and Analysis

John Snow, Treasury Secretary
FOX News Sunday
December 19, 2004.

CHRIS WALLACE, FOX NEWS: The Los Angeles Times reports that the White House wants the Pentagon to cut tens of billions of dollars from upcoming budgets. The paper also says military officials are preparing an Iraq war supplemental budget of $80 billion for next year. That's up more than 20 percent from this year.

Well, this week President Bush held a two-day economic conference to start selling his ambitious second-term agenda. After the president, the official who may have the biggest job pushing Social Security and tax reform through Congress is our first guest, Treasury Secretary John Snow.

And, Mr. Secretary, welcome. Thanks for coming in today.

JOHN SNOW, TREASURY SECRETARY: Thanks, Chris. Good to be with you.

WALLACE: The centerpiece of the president's plan for Social Security reform is the creation of these private savings accounts. But if younger workers are allowed to put up to two-thirds of their payroll taxes into these private accounts, won't their Social Security benefits from the government be cut?

SNOW: Well, Chris, look, this is a problem that's got to be addressed. We have no option if we're to avoid deep cuts in benefits or huge payroll increases in the future. So it's unavoidable. We don't have any option.

If we do nothing, the problem doesn't increase, but the time to build reserves to address it decreases. Remember that, today, those "huge payroll tax increases" are less than 1% of payroll (according to the Social security Trust Fund actuaries, half that amount according to the Congressional Budget Office) if we act today.

The president is showing leadership on it. And the unfunded nature of this is staggering: $10 trillion. It's a real cost. And these personal accounts are a way to help provide security for people for their future and help us find a solution to this huge problem.

The use of unfunded liability is deceptive as an indicator of size and nature of the problem.

WALLACE: But if I may repeat my direct question, as part of that, won't their government benefits be cut?

SNOW: Well, they're going to substitute benefits from the personal accounts, which can grow at a rate which is faster than the rate of buildup of benefits within the system. So they're going to come out ahead.

WALLACE: But they would lose some of the government...

SNOW: They take money that would be going into the system, it gets put into these personal accounts. They reduce their claim on the system, but they get the personal accounts as a nest egg, which will grow faster, at least have the opportunity to grow faster, than the reduction in the payout from Social Security itself.

WALLACE: So anyone who is investing in these private accounts would be trading the chance - maybe, as you say, a very good chance, but still the chance - for higher returns from these private accounts for a certain cut in their government benefit?

SNOW: Well, remember, it's all voluntary. It's all voluntary. And nobody...

WALLACE: But that would be...

SNOW: That's right. You reduce your claim in the future against Social Security so the government's long-term obligation goes down. But you have this private account which allows you to build a retirement nest egg and, to do so, earning a market rate of return which is higher than the rate of return on Social Security.

The use of rate of return is a perfectly valid measure for a savings program, but Social Security is notand never was a savings program. It's a tax.

WALLACE: Let me ask you about that, though, because the whole point of Social Security, when it was formed, was to guarantee a social safety net, a safety net for our senior citizens.

Now, some countries have already started these private accounts, such as Britain and Chile. They've had it for years. And in some cases, certainly not all, but in some cases, some of the elderly who have put their money into these private accounts have ended up losing money.

What would happen in this country if some seniors should end up losing money because of their investment in the private accounts and end up not having enough to make ends meet?

SNOW: Well, Chris, look, this is to supplement Social Security, right? It's an add-on. It's an addition.

WALLACE: Well, it isn't an add-on because you said it's a tradeoff.

SNOW: Well, but you still can claim part of your Social Security, right?

WALLACE: Right.

SNOW: So you get both that and the nest egg that comes from the personal savings accounts.

Wallace, of course, is completely correct here. Money placed in the voluntary personal savings account reduces the guaranteed payout of traditional Social Security. Snow shouldn't even be arguing this one. Putting 2% of salary in a personal account leaves slightly over 3% of salary to build credits for retirement in the traditional plan, cutting the Social Security benefit by almost 40%. (That sum is expected to be more than made up by the return from the amount put in personal savings.)

But these are going to be safe investment vehicles. They'll be something like the investment opportunities that government employees have through the government Thrift Savings Plan, the 401 plan for the federal employees, which gives federal employees five options, five prudent options, in broad-based investment vehicles.