A Lousy Investment
Social Security made sense in 1935. In 2001 it's dangerously outdated.
BY PETE DU PONT
Wednesday, July 25, 2001 12:01 a.m.
opinionjournal.com
The release of the interim report of President Bush's Social Security Commission marks the beginning of a reform effort that is of fundamental interest to every American family.
A pair of tables in the report answer two important questions about Social Security: How long must I live to get my money back? And what is the real rate of return on the money I have paid in? (You can find the report, in PDF form, here, and the tables appear on page 7.)
One shows that for men retiring in 2001 and thereafter, the number of years an average earner must collect Social Security benefits just to get back what he paid in exceeds his life expectancy. Women retiring after 2010 will have to collect benefits for longer than their life expectancy to break even. For black Americans the news is even worse; because of their shorter life expectancies they will on average receive $21,000 less in benefits over their lifetimes. Another example from the report: "Workers paying the maximum tax into Social Security and retiring in 2030 [today's 35 year-olds] would have to live past age 110 simply to get back what they had paid in."
The other table shows the real rate of return today's workers in their 30s can expect from their Social Security taxes. For single 30-year-old male average-wage earners it is 1.13%; for their female counterparts 1.59%. For younger singles it is even lower; for couples it is higher--but rarely is the Social Security rate of return comparable to market investment returns.
Even the safest market investments offer higher returns than 1.13% or 1.59%. U.S. Treasury inflation-protected bonds yield about 3.4% and are backed by the "full faith and credit" of the U.S. government. They are a legally enforceable obligation of the government, while Social Security benefits have no legal backing at all; they are, in the words of the commission, "a political promise that can be changed at any time, by any amount, for any reason."
In other words, if you are 50 or younger, Social Security as we know it is a lousy investment.
The Interim Report makes two other points that should help focus the debate. One is that Social Security is not a monetary asset for the federal government; that is, the money paid into the system isn't accumulating in a "lock box" with your name on it. If it were, those thousands of dollars would show up as a real government asset, just as your savings account is an asset of yours. And the government could use that asset to pay your retirement benefits. If your retirement funds were in Treasury bonds, stocks or mutual funds, they would show up as assets too.
But your prospective Social Security benefits are only a promise for the future, not assets that you can draw upon to fund your retirement. That's why the Social Security system should be changed to allow you to put some of the taxes you pay into real assets, so that you are actually accumulating money for your retirement.
The second point underscores the very small amount of savings that most families have accumulated over time. Personal saving as a percentage of disposable income has been steadily declining for 30 years, from a high of 9.3% in 1974 to a negative 0.1% last year. As the report says, "four out of every nine households in the United States saved nothing at all in 1998," and "the median U.S. household owned only $17,400 worth of financial assets in 1998, including retirement accounts. For African-American and Hispanic households the numbers were only $3,060 and $1,200 respectively."
That so many families have accumulated so little financial security is a terrible vulnerability. That the Social Security system has not helped them accumulate any assets at all and "does nothing to promote individual savings or investment" is a failure of government policy that must be corrected.
In fairness, the Social Security system is of another time, designed to meet the needs of different families in different circumstances. It successfully achieved its goal until the demographics of the baby boom generation and the blessings of longevity overwhelmed it.
We have learned a great deal about markets since Congress created Social Security in 1935. The power of markets has transformed the world--and it has transformed retirement incomes too, for those fortunate enough to have the opportunity. The several thousand men and women working in municipal governments in three counties around Galveston, Texas, who opted out of Social Security in the early 1980s (when it was still legal to do so), have enjoyed annual market retirement yields averaging 7.5% over 20 years.
To exclude American families from the opportunity of building a nest egg by insisting they remain in a system that is, as the report says, "utterly devoid of options for building a net worth," is a terribly wrongheaded policy. America shouldn't lock young people into a system that will not meet their retirement needs, or even allow them to get back the money the law has required them to pay in payroll taxes.
The commission's interim report is a clear and fully documented analysis of the problem. Its next report, in the fall, will recommend some solutions that will involve allowing individuals to participate in the growth of the market, gain a far greater return on their retirement investments and begin to own real assets to retire on or leave to their children when they pass on.
When it comes to saving and funding retirement, America can do much better. This report is the first step in designing a better system.
Mr. du Pont, a former governor of Delaware, is policy chairman of the Dallas-based National Center for Policy Analysis. His column appears Wednesdays.
* * * |
