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Editor’s
Note: This is adapted from the second in a biweekly series of
Social Security strategy memos from Americans for Tax Reform.
 resident Bush's
Social Security reform commission met for the first time on Monday.
Calm, reasoned and brave, they began to consider how to design a
personal-account option for Social Security, which is truly the
most progressive idea on the national agenda today.
Yet, on the same day, many so-called progressives proved that the
Berlin Wall lives on in their own minds, completely shutting out
any new idea that does not involve ever more centralized power in
the hands of Big Government. It doesn't matter how much the idea
may benefit working people, people of color, women, or children,
whom these progressives so loudly claim to represent.
The Wealth Gap
Self-proclaimed progressives have expressed great concern in recent
years over a growing "wealth gap" in America. The top half of income
earners have been riding the long-term capital-market boom, through
IRAs, 401(k)s, stock options, etc. But those among the lower half
of income earners are missing out, as they do not have the funds
to save for such investments. As a result, they have been falling
farther and farther behind, and the distribution of wealth and income
is becoming more unequal.
This concern was reflected in the comments of commission member
Sam Beard, who noted on Monday that the bottom 50% of income earners
hold only 2% of the national wealth. But as a forward-looking, open-minded,
liberal, progressive thinker, Beard realizes that the personal accounts
are the perfect, indeed, the only realistic and practical answer
for this concern.
A personal Social Security-investment-account option gives lower
income earners their chance to participate in the capital markets.
With the bottom half of income earners accumulating substantial
capital for the first time, wealth and income distributions would
become far more equal. Indeed, calculations done years ago by Harvard
Professor Martin Feldstein indicate that shifting completely to
personal accounts would reduce the national concentration of wealth
by 50%.
Better Benefits
Far more concretely, personal accounts would produce far higher
returns and benefits for lower income workers. In A New Deal
for Social Security (Wash. D.C.: Cato Institute, 1998), Michael
Tanner and I offer the example of a low-income, two-earner couple
with each spouse earning the equivalent of the minimum wage throughout
their careers. Suppose they could save and invest in a personal
account what they and their employers would otherwise pay into Social
Security.
After accounting for the survivors and disability benefits of Social
Security, assume that with their funds handled by a major investment
firm along with the funds of many other workers, the couple earns
a 4% real return on their retirement investments. This is just over
half the average return earned in the stock market over the last
75 years, and a modest return on a mixed portfolio of stocks and
bonds.
The couple would reach retirement with a trust fund of about $375,000
in today's dollars, after inflation. The couple could use this fund
to buy an annuity paying of about 2.5 times what Social Security
promises, but cannot pay based on the government's own projections.
At a 6% real return, which is still less than the average stock-market
return over the last 75 years, the couple would retire with a trust
fund of almost $700,000 in today's dollars. That fund would finance
an annuity paying them about five times what Social Security promises
but cannot pay. Indeed, the fund would pay more than what Social
Security promises out of the continuing investment returns alone,
while still allowing them to leave the fund of almost $700,000 to
their children.
Perverse Discrimination
Perversely, Social Security promises an even worse deal for African-Americans.
Because of their lower life expectancies, they tend to live fewer
years in retirement to collect benefits, resulting in even lower
returns. A black male born today has a life expectancy of 64.8 years.
But the Social Security retirement age for that worker in the future
will be 67 years. That means probably the majority of black males
will never even receive Social Security retirement benefits.
The Heritage Foundation took this into account in a groundbreaking
study calculating promised Social Security returns for African-Americans.
This study found that the promised Social Security return for a
low income single black male aged 30 today is a negative 0.66%.
This is like paying the bank for holding your money, rather than
receiving interest.
For an average income 30-year-old single black male, the promised
return is negative 1.5%. A two-earner, low income, black couple,
each age 30, with two kids would still only receive a return of
1%. For the same couple with average income, the return would be
zero percent.
In sharp contrast, the real rate of return paid by stocks over the
last 75 years has been about 7.5%. The real return on corporate
bonds has been around 3% or more. An investment portfolio with half
of each would earn about 5.5%.
With the personal accounts, this negative effect on blacks can be
avoided. African-American organizations like the NAACP can offer
investment programs and annuities to their members that take into
account their lower life expectancies. Retirees can also use only
part of their funds to buy an annuity matching what Social Security
would pay, and keep the rest in reserve to use as they choose, leaving
any remaining funds at death to their children. Those who die before
retirement can also leave their account funds to their families.
The Worst Is Yet to Come
Of course, the government's own projected long-term financial crisis
for Social Security means the program will be an even worse deal
in the future than suggested by the discussion above. The government's
own reports indicate that in order to pay all promised benefits
to those entering the workforce today, Social Security revenues
will be sufficient to cover only about 50% to 70% of promised benefits.
The program's benefits will consequently have to be cut by 30% to
50%, or taxes raised by roughly 50% to 100%, or some combination
of these two, to close the financial gap. Any of these options would
lower the effective rate of return paid by Social Security, making
the program an even worse deal.
These results would be most harmful for lower income workers. For
these workers can least afford to pay higher taxes, or to suffer
reductions in the meager benefits that Social Security promises
them. To the extent workers can shift to personal accounts, however,
all of this would be avoided.
Blind to the Possibilities
But you wouldn't have heard any of this, or even a response to it,
if you had attended the Left's "counter" press conference held right
next door to the commission's meeting on Monday.
Substantively, the event was much like a circus. Among those featured
was the badly misinformed Judy Chesser, public-policy director for
United Cerebral Palsy. Ms. Chesser shook with fear and rage over
the alleged sharp benefit reductions that would result for the disabled
under President Bush's personal account option. She is apparently
unaware that the president has already stated that his personal-account
option would make no change in Social Security's disability benefits.
Then there was the badly confused Deborah Briceland-Betts, executive
director of OWL, the self-appointed "Voice of Midlife and Older
Women." She testified that a personal-account option would be bad
for women because they don't have any savings; "You can't save if
you don't have the money," she hooted.
But this is exactly why women need a true personal-account option,
where they can pay part of what they and their employers are already
paying into Social Security into personal accounts. Otherwise, the
great majority of working women will not have the funds to save
and invest in the capital markets, and will just fall farther and
farther behind. Maximizing the confusion, Ms. Briceland-Betts was
apparently in lock step with her colleagues, insisting that personal
accounts would be fine as an add-on to Social Security, where workers
would have to come up with additional funds on top of what they
are already paying into Social Security (funds, curiously, which
she just told us women don't have).
But the central charge, echoed from the first speaker to the last,
was that Bush's personal-account option would require draconian
Social Security benefit cuts of 20%, or 40%, or even 50%. But quite
obviously, no one on the commission, let alone the president of
the United States, is going to propose such foolish benefit reductions.
The speakers nevertheless insisted that such cuts were inevitable
because with Social Security tax funds going into personal accounts,
there wouldn't be enough money left to pay promised benefits. Since
neither the president nor the commission has specified where the
funding would come from to continue to pay benefits, the speakers
insisted that we could only assume that benefits would have to be
cut to make up the shortfall.
Bush has long stated that he would use current Social Security surpluses
to pay for the contributions to the accounts. If the trust funds
are given federal bonds in return for the money going into the accounts,
then there would be enough funding to pay for Social Security benefits
through 2038, under current projections.
Over the longer run, the personal accounts would reduce the financial
obligations of Social Security, as a substantial portion of the
program's currently projected benefits would be paid through the
personal accounts instead. Indeed, to the extent that workers were
able to use the accounts in place of the current program, the accounts
would ultimately reduce Social Security's long-term financing gap.
If more funds are needed in the interim, Bush indicated during the
campaign that he would use general revenues to make up any gap during
the phase-in period. Those advocating a personal-account option
for Social Security have said for over 20 years that some general
revenue financing would be needed during the transition. Social
Security benefits should not be cut in any way to finance the transition
to personal accounts.
The commission may propose reductions in the long-term growth of
Social Security benefits to eliminate entirely the current projected
deficits in Social Security. But those benefit changes would be
due to Social Security's long-term financing crisis and would have
nothing to do with the personal account option.
Workers in other countries around the world are, in fact, already
earning increased benefits through such personal-account options.
Polls consistently show that a substantial majority of American
workers believe that they would get increased benefits from such
personal accounts as well. Self-appointed left-wing elitists who
would deny them this choice are not benefiting, or truly representing,
the working people of America.
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