WASHINGTON — Republican presidential candidate Fred Thompson on Friday proposed to stabilize Social Security's long-term finances by greatly reducing the benefits to be paid out over time, even to low-wage workers, and creating voluntary retirement investment accounts so that individuals could try to make up the difference.
Thompson said his plan has a sort of tough-love message that Americans need to hear when it comes to getting entitlement spending under control: "There are no free lunches for anybody in this."
He cited projections that the Social Security Trust Fund will run out of money by 2041 and said he doesn't favor raising taxes to sustain the current benefits formula.
He also challenged his rivals for the Republican nomination to put forth competing proposals.
However, Thompson acknowledged that with Democrats in charge of Congress and partisan differences as high as they are now, "we couldn't do it under present circumstances."
Under his proposal, Americans born in 1950 or earlier wouldn't be affected.
Younger workers who agreed to pay 2 percent of their pre-tax wages into a voluntary account to invest in stocks and bonds would be rewarded with a federal investment match — $2.50 for every dollar contributed up to a certain amount, then 50 cents on the dollar. The money for the match would come from Social Security funds.
That could translate conservatively to $280,000 for a 22-year-old earning $40,000 who works to age 67.
But those who chose to opt out of the "add-on" accounts would face a harsh reality if they intended to rely on Social Security benefits alone in their retirement years.
Thompson would change the formula for calculating benefits, indexing them to prices, which rise more slowly than wages. Under that change, by 2075 benefits might be reduced on average by 46 percent compared with benefits under the current formula, according to an analysis by the liberal Center on Budget and Policy Priorities.
Thompson's proposal differs in two ways from President Bush's failed 2005 effort to create private accounts. The president envisioned the accounts as "carve-outs" from — or substitutes for — the existing Social Security program, while Thompson's would be add-ons to it.
Bush, however, was open to exempting low-wage earners from indexing changes because they rely most on benefits. Thompson's plan would change benefit calculations for workers of all incomes. He acknowledged it "might be more difficult for others to participate" but said it's "what's best for the country."
Jason Furman, a senior fellow and Social Security expert at the center-left Brookings Institution, said the biggest risk in Thompson's plan is workers opting out of the voluntary retirement contributions either because feel they can't afford it or because they don't understand how much smaller their benefits will be.
"This shows that if you're completely unwilling to bring new revenue into Social Security, you end up necessarily with very large and unpalatable benefit reductions," Furman said.