The New Progressivism
Personal Social Security accounts will give low-income earners the chance to participate in the capital markets.

By Peter Ferrara, associate professor of law at the George Mason University School of Law, senior policy adviser to Americans for Tax Reform on Social Security, & research director of the For Our Grandchildren Campaign
June 13, 2001 10:55 a.m.

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.