The Left’s favorite economist of the moment, Thomas Piketty, organizes his argument in Capital in the Twenty-First Century around the statement r > g, where r is the rate of return on capital and g is the rate of economic growth. If r > g, he argues, then economic inequality will inevitably increase and will indeed be compounded, as the income derived from capital outpaces the income derived from other sources, such as wages. Putting it in the shape of a formula gives a certain science-y panache to the utterly uncontroversial observation that people who save and invest their money will generally end up richer than those who don’t. Professor Piketty argues that preventing the growth of corrosive inequality requires reducing the wealth of investors, which he proposes to accomplish through a fancifully conceived global tax on capital.
As Tyler Cowen and Arpit Gupta have argued, r > g is a stronger argument for privatizing Social Security than it is for a global capital tax. (Professor Cowen opposes such privatization but writes that he would be better disposed toward it if he agreed with Piketty’s assumptions.) If investment income really is to grow at a much faster rate than other kinds of income, then the most sensible thing to do is to encourage — or even require — investment. Much as I dislike federal mandates, redirecting the money hijacked out of Americans’ paychecks through Social Security taxes — subsequently to be micturated away on various political enthusiasms — and putting it in real investments is a very attractive option. And not only for the returns.
But let’s consider those returns. You pay, officially, 6.2 percent of income up to $117,000 a year for Social Security. Your employer pays another 6.2 percent, and many economists and nine out of ten people who were born at night but not last night assume that you really pay that part, too, in the form of lower wages. The IRS even seems to believe that, which is why self-employed people pay 12.4 percent. That money is not invested, so there is no return on it. The theoretical return you get on your Social Security “investment” depends on many factors: how long you live, when you retire, average monthly income during the 35 highest-earning years of your life, etc., along with — and this is important — future public-policy decisions that will be entirely out of your hands.
Professor Piketty estimates that the return on capital over the coming decades will be between 4 percent and 5 percent; historical returns to equity investments run about 7 percent, but let’s be conservative and split Professor Piketty’s estimate, assuming a 4.5 percent return. And in keeping with the first theorem of English-major math, let’s replace that 12.4 percent Social Security tax with a poet-friendly 10 percent. Investing 10 percent of your income at a 4.5 percent return over the course of a 45-year working life produces a higher income in retirement than you enjoyed in your working life, regardless of your income level. It’s true if you make $10 an hour or $10,000 an hour. Example: Assume you make the modest sum of $20,000 a year and never get a raise. You invest $2,000 a year at 4.5 percent for 45 years and end up with just over $300,000, which, taking the most risk-averse course, can be converted into an annuity paying $1,800 a month, more than you made in your job. In fact, by the end of your working life, the returns on your investment — just the returns — would add up to about 70 percent of your salary. Start working a few years earlier or work a few years more, and the numbers are even better, enough to have a substantially higher income in retirement than you had when working.
Professor Piketty rejects such investments, citing the volatility of investment income. (As several critics have pointed out, he gives scant consideration to the risk of holding capital when considering the question of inequality, which is odd: Returns on investments are the payment one receives for bearing risk.) He writes: “For a person of sufficient means who can wait ten or twenty years before taking her profits, the return on capital is indeed quite attractive.” And it’s even more attractive at 45 years or 50 years, which is precisely what we should be encouraging.
There are all sorts of caveats to be issued here, of course: The transition to an asset-based system rather than a cash-flow-based system would be hairy indeed, and such a system would create some opportunities for cupidity, stupidity, fecklessness, recklessness, and more, although it should be borne in mind that — the three most important words in political economy being “Compared with what?” — those opportunities for trouble would constitute a substantial improvement on our current Social Security program, the failure of which is an inevitability.
There is another piece to this that bears keeping in mind, something I touched on earlier this week in exploring the disconnect between the symbolic money economy and the economy of real physical goods and services: Those investment returns are not simply the distillate of corporate earnings statements. Investments in real businesses provide real capital to power the real economy. An investment in Merck isn’t just a stock you hold: It’s an investment in the very products you will need in your retirement. If Merck or one of its competitors makes a breakthrough in, say, the treatment of rheumatoid arthritis, you could make a pile of money — which you will enjoy much more if there’s a good treatment for your rheumatoid arthritis.
When it comes to the so-called problem of economic inequality, me and dead owls don’t give a hoot. But if you want a radically richer society, there are few more reliable ways to get there than savings and investment. And if that spreads around some of the benefits of holding capital and allows the intergenerational transfer of real wealth from real investments to transform a few million families and enrich formerly impoverished communities, then three cheers for the guys in the pinstriped suits.
I suppose we have to consider the politics, too: A guy who works as a retail manager and has $700,000 in his retirement account smells like a Republican to me, somebody who’s going to be damned surly about things like inflation, income redistribution, and the imposition of punitive taxes and regulations on businesses in which he is invested with his own money; the same guy dependent on a pitiful little check from the government smells like a Democrat, one inclined to moaning about the fat cats and inequality and the general unfairness of it all.
And that, I suspect, is why Democrats will fight all the way down to bloody stumps to stop Social Security reform. It’s harder to recruit a guy with a fat portfolio into your harebrained class war, whereas a guy getting a government check is an easy mark. He might not be depressed enough to read Capital in the Twenty-First Century, which I suspect will join A Brief History of Time among the best-selling-least-read books of our time. (“A classic,” Mark Twain said, “is something everyone wants to have read and no one wants to read.”) But if he’s eating the federal cheese, he’ll keep voting for Democrats, even if he never stops to appreciate the irony in Harry Reid (D., Ritz-Carlton) getting rich peddling envy to rubes like him.
— Kevin D. Williamson is roving correspondent for National Review.