April 1 , 2005

U.S. Senator Johnny Isakson (R-GA)
Speech on Social Security
Atlanta Press Club

In an article written about me, about three months ago, the dean of Georgia political writers for Georgia, Bill Shipp, which means he’s older than everybody else, wrote the following paragraph about me, “Next year when you see Johnny Isakson on CNN and Fox News, you’re gonna miss Zell Miller.”

I kind of agree with him. I mean, Zell’s about as animated and interesting and talented a guy as I’ve ever known, and I’ve been accused of being a boring guy when it comes to issues, speaking and animation in general. And today I’ve taken a great risk. I’ve come to the Atlanta Press Club to talk to influential Georgians about a subject that can be made extremely boring because it deals with numbers, and it’s called Social Security.

But I want to do it, because I have a sincere interest in seeing to it that this debate goes beyond those who just pick it apart before it starts, and really goes on to looking at the future not only for the betterment of our families, but for our children and our grandchildren – and understanding that change is not a bad thing. It’s like my wife always said, “Okay, change is fine; you change first.” That’s the way the world is – no one wants to be the first one to change. The human reaction to change is a natural fear, but most everything in America that has happened for the betterment of healthcare, government, education and American enterprise has been born in change.

Change is not in and of itself, a bad thing.

Now here are the ground rules: for those of you that want research, you go to socialsecurity.gov, savingsocialsecurity.gov, you go to “compound interest” on Google, and pull of the first website on Annuities, Compound Interest, and the rule of 70 seconds. Or, you go to the United States Government website on the United States Senate and pull up all my financial disclosure statements. It’s from those resources that I’m going to talk to you today. So you can go check everything I’m telling you. I’m not going to use hypothetical examples to sell you a thing.

I made my living selling houses for 33 years, and my father taught me something very valuable. He said, “Under promise and over deliver and you’ll be a success. Over promise and under deliver and you’re gonna be out of here.” And so I’ve always taken that approach in my business and I’ve always taken that approach when I’ve dealt with the issues of the day, no matter what they might be.

There’s one other reference. Pull your letter from the Social Security Administration – you get one once a year. How many of you got one this past year? Now how may of you read it? You know what the front page says? Social Security is in trouble and if it’s not fixed, it’s not going to be able to meet it’s obligations by 2042 which by the way, now is 2041 after last year’s report came out.

Can you imagine if your insurance is with Mass Mutual and you got your annual statement and it said, “Congratulations, your file is no longer worth what it used to be.”? I mean, what would we do? We would go up in arms. Now what the President has done is taken the message you got in the mail and said it’s time for us to have a dialogue on it. And so to contribute that dialogue today for a brief few minutes, I’d like to talk about the issue of personal accounts, because the President has issued the idea of personal accounts as a part of the modernization of the Social Security System.

Now on my statement, if you read it closely, it will say that my employers paid $207,688 in Social Security payroll taxes in the 42 years of my working life. It will tell you that it will pay me, as long as I live from the age of 66, $23,534 without any of the adjustments that will come. Now I’d like to give you an interesting number, at that same amount of money that was paid in Social Security taxes from payroll taxes in 42 years, that invested and compounded at five percent a year, it’d be worth in the area of $707,000, which annuitized, would have paid me $41,000 a year.

But that would be an unfair comparison, because Social Security is a social insurance program. It is a program with which we have had obligations to our citizens. Its origin was to ensure that our seniors didn’t retire into poverty, and it is meritorious in its use. But what has happened over the years is, the numbers changed. Remember that word change? We went from 40 or so workers to one beneficiary, to 3.3 today and in 20 years it will be 2 to 1. Those numbers don’t work on any insurance model of any type.

The President has proposed introducing the personal retirement accounts as a component of Social Security. Let’s talk, using real examples again, about how that might work. The President has said you’d be able to self-direct up to four percent of the 12.4 percent in payroll taxes. It would put a portion that comes out of what you pay, into a retirement account, which you’d never touch the money- you never touch your Social Security payments now, because your employer sends it to Washington before you ever get it. That’s that great thing called withholding that’s one of the greatest all-time inventions – give $50,000, get back $38,000 and think you’re getting $50,000 – I never understood that. Anyway, that’s another subject. You never see that money, just like you don’t see the money for your health insurance that your employer deducts – before taxes I might add – and self-directs for you to pay the cost of your family premium – same business.

The President suggests you’d be able to self-direct up to four percent if you’re under the age of 55 into a personal retirement account. Now that amount is approximately a third the payroll tax paid. I want to tell you a very interesting scenario by way of example – had I been allowed to, and had I done – self-directed a third of my payroll taxes over the 42 years in which I had paid into the Social Security system, had I self-directed at five percent, compounded annually, it would have totaled $235,145 today. That would pay me, at five percent interest for the rest of my life, $11,754 a year, and I would never touch a dime of the principal.

In the Social Security letter to you, it tells you that Social Security will only be able to pay you, in the year 2042, 73 percent or less of what it has told you that it would send to you. That $11,000 would be a part of subsidizing what Social Security, under the current formula, could not afford to pay.

So, the rule of 70 seconds, the compounding of interest and the time-value of money, work. Now before I get into dealing with the four major objections of personal accounts as a part of the solution, let me tell you about three major events in my life that have illustrated the power of opening up this opportunity to the American people.

The first one took place in October of ’67 when I asked my wife to marry me, and three days later, we want to the old Jefferson’s Jewelers down on Peachtree where the old Lowe’s Theater used to be, near Pete Correl’s building today, and I allowed her to pick out the stone, which cost $800, which in 1967 was a lot of money, particularly since I was making $5,000 a year.

I had the inspiration of desperation to save for a honeymoon, which cost me $453 and that ring, which cost me $800. I was getting married in June, so I had eight months to do it – Pete McTier knows this story, because he lived next door to the girl I married and watched me kiss her all night long in the car in the parking lot. But I had the inspiration of desperation. I put the money away and I saved it.

In 1976, I had a second life-altering event – the Atlanta Journal-Constitution, which provides great services to us, as does all media – decided to do an article on what it was going to cost to send your children to a public or private college 14 years later in 1990. I had a six year-old son, a four year-old son, didn’t have my daughter yet, but she was on the way. I read the article and almost had a heart attack. I could not imagine it costing $25,000 or $30,000 to go to a public university and $60,000 or $70,000 to go to a private university, and I was right – it cost $60,000 to go to a public university and $125,000 to send my son to Tulane.

But because of that article, we began saving. And because we did save and because of the power of compound interest and because of the time-value of money, my children got a college education. And because the Atlanta Journal-Constitution, which in that article got me between the eyes and educated me, I did what I was supposed to do – I took personal responsibility for an obligation that was coming.

Now the third life-altering change for me was when my father explained the reality of being a salesman all your life. He said, “We don’t have pensions. You’re going to have to save along the way for what you’re going to have when it’s over, because we ain’t got no pension.” And I think “ain’t got” are the words he used, by the way.

And so from the time I started selling houses, got married and raised those children, in addition to saving to send them to colleges or universities, Dianne and I tried to put money away so that when I decide to retire, if I ever did, or if I passed away, they’d be taken care of. Not that I didn’t think Social Security was important, I was smart enough to know it was what it’s letter says it is. It is a supplement; it’s not something on which you can entirely depend. Although some people do entirely depend on it – which is why it’s so important that we save Social Security.

Now let’s talk about the legitimate objections that you’re going to hear about allowing personal savings accounts. You’re going to be told that people are not sophisticated enough to invest their own money. All right, if you buy that for a second, and there is a good point there, you’re saying that what they’ve got right now is better and what they’ve got can’t pay them what it promised.

The President has said we want to allow them to self-direct funds like the Thrift Savings Plan. The Thrift Savings Plan is what every government employee can do – they can self-direct a portion of their income. They can select from five accounts – cash, bonds, large cap index, small cap index or international index – managed by a five member board, selected by the United States government that’s immune from politics. In fact, the appointees the President recommends would have a status similar to Alan Greenspan – so it’s an un-political job. It’s not going to be managed by Wall Street, it’s going to be managed by people in the Thrift Savings Plan, who for years, have managed a fund just like this.

Now I’m going to use my own personal experience as an example, to show you how clearly the objection that you’re not sophisticated enough that you can’t take this risk. If you assume for a second that someone was self-directing the money and they had only those choices – those choices by reasonable people who understand their financial responsibility, you will have a great program.

Now I went to Congress in 1999, and when I did, I took money that I had and I put it in an account and I said I’m not going to touch this – I’m on a fixed income, I’m no longer a salesman and I need to be prudent in what I do. I put that aside in 1999 in a managed account. Over the next six years, I didn’t add any money to it, nor did I take any money out of it – it was there to grow. It was managed by a company here in Atlanta, based on a very conservative approach that I took, based on the fact that I’d be 60 one day, which I am now. Between 1999 and shortly after 9/11, 2001, that account lost 38 percent of its value. Today that account is about where it was in 1996 before it went through a decline in the market. And you can test any other company or brokerage house and they’ll give you these windows where they did real good. But the fact of the matter is, most everybody went down somewhere between 30 and 40 percent and most everybody is back to where they were if they stayed the course and took advantage of the time-value of money.

Over the same six year period, I was investing in the Thrift Savings Plan. And starting with zero in 1999, and putting aside $10,000 a year over six years, I have an account in managed funds that’s worth $91,000. Now you ask yourself, wait a minute – if this account you had went down 38 percent, yet the one you’re investing to, you put $60,000 in six years – well how can that be? Well how it can be is the following: if you’re self-directing on a monthly basis, you’re dollar cost averaging in the market. When I was in Thrift Savings Plan, I was buying in the down years as well as the good years. So I was profiting in the days when it was cheap, post 9/11. And over a broad period of time, that’s the way it works.

Secondly, the President has proposed a life-cycle approach to these investments. A life-cycle approach means there’s a formula, and as you get older, the cycle becomes more conservative and less risky – not that these things are really risky at all – but there’s some risk in everything. The life-cycle approach is brilliant, and it’s something like: you ought to have in cash, the percentage equal to your age and in stocks, the number of years left until you’re 100. If you’re 20, you’re 80 percent in stocks and 20 percent in cash and bonds – if you’re 60, you’re 60 percent in cash and bonds and 40 percent in stocks.

That’s a life-cycle approach to conservatism and preserving that value. There’s no guarantee, but there’s no greater teacher than experience.

Now secondly, most people couldn’t handle the money when they turned to 65 or 66 and get it. The plan doesn’t say they’re going to turn the money over to you. It says what you’re required to do, is out of that principle that you’ve accumulated in the personal retirement account, you buy an annuity to annuitize and to see to it that it makes up the difference in what Social Security is not paying you and what you would have gotten and any other formula that you might have – because when you opt for the personal account, you’ll cap the amount that Social Security will pay you. And if it’s an amount over that annuity, you can leave it in or you can take it out – but you can’t just take it out and blow it and spend it – you have to annuitize it to make the difference.

And then they’re going to tell you that it doesn’t solve the problem. Well, it doesn’t solve the whole problem – but doing nothing doesn’t solve it either. Folding your arms and saying, “We’re not talking as long as you’re talking about this or that,” doesn’t solve anything. You haven’t heard me say there’s a single thing off the table, and I’m not about to if I’m trying to keep something on the table. But that’s an irresponsible reaction from those groups that would say that. Sure it doesn’t solve all the problems, but it helps. It helps because it begins to put some limitation on the actuarial liability of the system, while providing a mechanism for the individual to actually beat that liability and improve their situation.

And then they’re going to tell you it creates more debt now, and they’re right – and it creates less debt later. So it’s a partial solution. But if you take the piece of the information that those that are averse to even talking about and you analyze it, they are telling you the following: we ought to tweak the system. Let me tell you what tweaking the system means: if you continue to do what we have done for Social Security for the last 75 years, within a couple of years you’ll have to raise the tax from 12.4 to 15.9 percent and that’s not my number. Go to savingsocialsecurity.gov when they give you all the examples. And when you raise it to 15.9 percent, it’s higher than the 10 percent entry-lever marginal rate for people in their income, it’s higher than the tax on dividends, and it’s higher than the tax on capital gains. And the people its most punitive to are the ones that President Roosevelt and the American Congress set out in 1935 to help keep above the level of poverty.

So yes, there are other things that are going to have to be done, but to totally disavow, to try and replace a legitimate proposal as a risky scheme when there are real live examples that are experienced by people every day just like me, that will counter everyone of those arguments is just not the right way to go about solving a problem.

Now people say I’m boring, they call me a moderate, they say all kinds of things about me. I learned a long time ago as my father said, “Son, just like a broken clock, even your adversaries are right about twice every twenty four hours, so don’t rule them out.” So I don’t rule anybody out. I want to sit down and talk to them, but I don’t want to talk to anybody that tells me we aren’t talking about this part of it.

We’ve got a tough job ahead, and I want to conclude with this: the rest of my life is about my children and my grandchildren. I say that in political speeches and people think that’s some line somebody wrote to make me warm and fuzzy – it isn’t. It’s exactly what my life’s about. Little Elizabeth is 13 months, little Jack is seven months, Charlie’s 13 years and Janie is 10 years – everything I do is about seeing to it that I do everything I can to make sure they grow up in a world that is as free, as opportunistic, as peaceful and as prosperous as the United States of America my father and my forefather allowed me to grow up into. And that means from time to time, you embrace change for the right reasons.

So the thing that I look to the most about personal accounts is this: it begins to reintroduce into the equation with positive influence, personal responsibility. I would long for the day that we never again say that we aren’t sophisticated enough to deal with savings because we as Americans in fact do save, and have systems that motivate us to do.

Just look what happened after IRA’s and 401k’s were introduced and Americans had a tax advantage to self-direct funds and save for the future. Look at what’s happening now with medical and health savings accounts in terms of what our young people are doing and in addition to taking advantage of the incentive, they’re taking the personal responsibility to understand what the benefit’s about, rather than anticipate the benefit without question.

I would submit to you that in the 21 st Century, the major solution to the majority of our problems is to take personal responsibility in all those things that we do. The more we do it, the better we will be as people, and the more we’ll have a partnership with the people we serve in government. I think the President has laid a legitimate proposal on the table that computes the time-value of money, the rule of 70 seconds and common-sense will tell you, in fact will work. It doesn’t solve all of the problem, but it’s the beginning of a new solution, for a new era and for my children and grandchildren.

I for one am going to talk about all issues on the table and address it forthrightly so that one day, we’ve taken a system that’s broken and we’ve modernized it for the 21 st Century.