Politics & Policy

Investment Accounts For Me, But Not For Thee

The real reason Ted Kennedy doesn't want workers to have personal retirement accounts.

The Left strongly opposes Americans controlling their own retirement funds through personal accounts. Senator Edward Kennedy (D., Mass.) says, “It would be an enormous mistake to substitute personal accounts for that guaranteed benefit [of Social Security].” Benefits are not guaranteed, however, under the current system. And people such as the senator have other means to provide for their retirement, leaving ordinary workers wondering why the Left wants to lock them in a system with meager returns.

Currently, most retirees rely on Social Security for the bulk of their income. These benefits are paid from a 12.4 percent payroll tax assessed on today’s workers. Since government bureaucrats control the tax money–employees don’t own and invest the money themselves–the rates of return on payroll taxes are predictably low.

The Urban Institute calculates that men age 65 to 74 receive a paltry three-percent rate of return. Women get 4.4 percent. That’s the high end. Returns fall for younger workers.

Men born between 1956 and 1964 will receive only 2 percent, women 3.3 percent. For those born today, the return will be a dismal 1.6 percent. Contrast these numbers with the higher returns in the stock market, where money is privately invested to maximize returns. History demonstrates that markets go up over the long term, and the long term is what matters for retirement investing.

Since 1926, the average real rate of return in the stock market has been 7.6 percent annually. During any 35-year period between 1872 and 2000, the S&P 500 outperformed what Social Security would have returned. Social Security is undeniably a bad deal–especially for younger people and future generations.

Workers would be better off if they invest their own payroll taxes in a safe mix of bond and stock index funds. Account balances could also be passed on to loved ones, something Social Security does not allow. The wealthy Senator Kennedy controls his retirement funds and gets a better return thanks to his access to the federal Thrift Savings Plan (TSP).

Three million federal employees, including members of Congress, invest pre-tax dollars into personal retirement accounts, which they control. Instead of Social Security, federal employees use the TSP, which allows them to allocate their retirement investments among five options, any of which beats Social Security’s meager two to three-percent return. TSP 10-year average returns range from 5.45 percent for the international stock index fund to 11.99 percent for the domestic stock-index fund.

Individually owned, privately invested accounts yield greater retirement security: TSP proves it. So why does Senator Kennedy want to deny workers the same ownership rights and higher returns that he enjoys? Because he knows such ownership will change people’s policy preferences. If the value of retirement nest eggs were tightly linked to individual earnings and long-term stock-market performance, people would demand a freer economy to pump up economic growth and stock performance. Freer markets deflate Big Government, which threatens the Left–but freer markets pay off handsomely for the individual.

If each state reduced its taxes, rules, and regulations to the level of Kansas–the most economically free state in the nation according to the U.S. Economic Freedom Index–personal incomes would rise an average of $1,161 a year, or 4.42 percent. If that were invested in the stock market over a 40-year working life at the historic return, a typical working American would have an additional $268,000 in his or her pocket at retirement. And since he or she is unlikely to spend that money all at once, there could be some remaining for heirs.

Ownership motivates people to think long term and to maximize the value of their assets. People act differently with borrowed goods than with owned goods; nobody washes a rental car, for instance. But the Left wants to keep working Americans in the Social Security rental car precisely because they know people tolerate more government when ownership rights are restricted. The Left views private retirement accounts as the biggest threat to Big Government since Ronald Reagan. And they are right.

That’s the real reason Senator Kennedy is fighting to stop ordinary Americans from having the same ownership rights over retirement funds that he has.

Lawrence J. McQuillan is director of business and economic studies at the Pacific Research Institute in San Francisco.

Lawrence J. McQuillan Mr. McQuillan is a senior fellow at the Independent Institute, the director of its Center on Entrepreneurial Innovation, and the author of California Dreaming: Lessons on How to Resolve America’s Public Pension Crisis.

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