5/15/00 2:55 p.m.
Bush’s Best Idea
He’s leading the way on Social Security.

By Peter J. Ferrara, former senior staff member in the Reagan White House Office of Policy Development

he personal investment account option for Social Security supported by George Bush is the most progressive reform idea in this election cycle.

Workers in the top half of income earners are riding the capital-market boom through 401(k)s, IRAs, stock options, etc. But those among the lower half of income earners are missing out, as they do not have the funds to makesignificant capital investments. As a result, they are falling farther and farther behind, and the distribution of wealth and income is becoming more unequal.

A personal Social Security investment account option gives these lower-income workers the chance to participate in the capital markets as well. They can then join the rest of the economy — with earnings as capitalists as well as laborers.

In A New Deal for Social Security, from the Cato Institute, Michael Tanner and I show just how important this is for lower-income workers. These workers — as well as average and upper-income workers — would receive far higher returns and benefits from investing through such personal accounts than they would from Social Security.

Take the example from the book, of a husband and wife who enter the workforce in 1985 and earn just the minimum wage for their entire careers.

Suppose that, from the start of their careers, they could save and invest in the private accounts what they and their employers would otherwise pay into Social Security.

We account in the study for private life and disability benefits to replace Social Security survivors and disability benefits. We also account for administrative costs, and show how the transition to the new system could be financed without undermining the workers' private retirement benefits.

Suppose that with their funds handled by a major investment firm along with the funds of many other workers, the couple earns a 4% real rate of return on their investments, which is just over half the return earned in the stock market over the last 75 years. They 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 about 2.5 times what Social Security promises — but cannot pay — based on the government's own projections.

In sharp contrast to these personal-account benefits, if we stay on our current course lower-income workers will be saddled with higher payroll taxes, lower retirement benefits, or both — none of which they can afford. Avoiding this long-term disaster scenario by shifting to personal accounts now is therefore extremely important for lower-income workers.

The shift to personal accounts would also produce important general economic benefits. With tens and ultimately hundreds of billions in new savings pouring into these accounts each year, national savings would likely increase substantially. This increase in savings means more capital investment producing more jobs, increased productivity, and higher wages.

Reductions in the payroll-tax burden as the reform proceeds over time would also improve the economy. All of this would, again, be most important to lower-income workers.

With lower-income workers accumulating substantial capital for the first time in their personal accounts, the overall national distribution of wealth would become far less concentrated. Indeed, one estimate suggests that an eventual complete personal account option would reduce the nation's concentration of wealth by one half. This, and the higher retirement benefits that would accrue to lower-income workers as a result, would mean a more equal distribution of income as well.

Finally, through this reform the socialist dream of the nation's workers owning its business and industry would be effectively achieved. But the realization of this dream is not likely to be what the socialists envisioned. For the new worker-capitalist owners are likely to be fierce new supporters of the free-market policies that will allow their new ownership interests to flourish.