Commentary

Closing the Wealth Gap: Allow Social Security Investment

A new report by the Federal Reserve reveals that the “wealth gap” in America may be the largest ever. According to the report, the difference in median net wealth between the wealthiest 10 percent of families and the poorest 20 percent jumped by nearly 70 percent between 1998 and 2001. The gap between whites and minorities grew by 21 percent. Both liberals and conservatives, Democrats and Republicans, should agree that this state of affairs is troubling.

News of this report will undoubtedly set off a new round of debate over tax policy and the value of various government social programs. But a remedy is already at hand: President Bush’s proposal to allow workers to privately invest a portion of their Social Security taxes through individual accounts. It will build wealth across the board. And it will help end the wealth gap.

Wealth in America no longer comes exclusively — or even primarily — from wages, but from investment. Roughly 52 percent of Americans now invest privately. But nearly half of Americans, mostly low- and middle-income workers, still are not able to participate in this route to financial wealth. This is not surprising. After paying for food, rent, medical care, and other expenses of daily living, they simply don’t have much money left over to save and invest.

Yet these same workers are being forced to pay 12.4 percent of their income into Social Security. Social Security may provide a barely adequate retirement income, but it generates no wealth. Workers don’t own their Social Security funds and have no legal right to the benefits. It is, simply, not wealth in the same way as a 401(k) plan, an IRA, or a bank account. The rich, however, have 401(k) plans at work: They have discretionary income with which to invest. They can accumulate greater wealth. The rich get richer; the poor do not.

Social Security may also lead to a greater intergenerational wealth gap. You can’t inherit someone’s Social Security benefits. A worker can pay 12.4 percent of his income into the system for 30 or 40 years, but, if that worker dies without children under the age of 18 or a spouse over the age of 65, none of the money is passed on to his heirs. As Jagadeesh Gokhale, a senior economist with the Federal Reserve Bank of Cleveland, and others, have noted, Social Security essentially forces low-income workers to “annuitize” their wealth, preventing them from passing it on to their heirs.

On the other hand, the wealth of more affluent people generally is inheritable. Thus, inheritance becomes a “disequalizing” force, leading to greater inequality of wealth in America. The answer is not to penalize the wealthy through inheritance taxes and such, but to allow poor workers to accumulate inheritable wealth the same way their wealthier counterparts can. Allowing them to invest their Social Security taxes would go a long way toward accomplishing that goal.

As the Cato Institute’s David Boaz has pointed out, Social Security can be thought of as the poor man’s death tax, and a 100 percent tax at that. This is a special problem for minorities — one out of three African-American men will pay into the Social Security system but die before collecting benefits.

Social Security reform is inevitable. Facing a $25 trillion shortfall, the program is unsustainable in its current form. But President Bush’s proposal to allow workers the option of private investment could create an opportunity to solve not just Social Security’s problems, but to also close the wealth gap. Or, as the president’s bipartisan Commission to Strengthen Social Security put it, “For the first time, the program can become an active rather than a passive instrument of personal financial security. Rather than ending with the life of the beneficiary, it can be a means of wealth accumulation and long-range investment, giving families resources they never had before, and widening the circle of Americans fortunate enough to pass on the accumulated results of their investment and hard work.”

That’s a message that everyone interested in reducing wealth inequality in America should heed

Michael Tanner is director of the Project on Social Security Choice at the Cato Institute.