Commentary

Personal Accounts Build More Than Just Assets

Make no mistake, the debate over Social Security will rage fast and furious in the fall elections. President Bush favors letting younger workers invest part of their payroll taxes in personal retirement accounts similar to IRAs or 401(k)s. Personal accounts’ higher returns could cushion the blow of balancing the current program’s finances as the population ages and baby boomers retire. Many Democrats oppose personal accounts and want to retain the traditional system, even if it means raising taxes to keep the program solvent. But these political debates over tax rates and trust funds are only half the personal accounts story.

Ongoing research indicates that the non-financial benefits of individual wealth building could be greater than the dollars and cents personal accounts would pay in retirement. Particularly for low-income Americans, personal accounts could strengthen families and communities today as well as boost retirement incomes tomorrow.

Evidence from experimental Individual Development Accounts (IDAs), pioneered by Prof. Michael Sherraden of Washington University in St. Louis, hints at the wide-ranging benefits Social Security accounts could have. Sherraden’s “American Dream Demonstration,” which began in 1997, works out of community organizations, social service agencies, housing organizations, and credit unions to enable almost 2,400 participants nationwide to establish savings. Individual savings are matched 2-to-1, enabling accumulation of up to $900 a year. Over time, savings from IDAs can mean the down payment to a house, college education for a child, a new business, or a retirement income well above what Social Security alone could provide.

But IDAs aren’t about making millionaires, they’re about making owners. And the benefits of even modest wealth building can be substantial. In testimony last fall before the President’s Commission to Strengthen Social Security, Prof. Sherraden summarized the highlights:

  • Account participants perform better educationally, and 60 percent say they are more likely to make educational plans for their children because they are saving.
  • Eighty-four percent of IDA participants feel more economically secure and 57 percent say they are more likely to plan for retirement.
  • Asset holding significantly improves long-term health and marital stability, even after controlling for income, race and education. Half of account holders report improved relationships with family members, and one-third believe that holding assets increased their community involvement or made them more respected by their neighbors.
  • Perhaps most importantly, 93 percent of individuals with IDA accounts feel more confident about the future and 85 percent feel more in control of their lives because they are saving.

Personal accounts could change the way a low-wage worker looks at his family, his community, and himself. Better yet, many of these benefits are passed on from parents to children.

Recognizing these benefits, the Clinton administration and Vice President Gore’s campaign proposed accounts giving low-income workers a three-to-one match on personal contributions. But these accounts shared the same weakness as Sherraden’s IDAs: low participation rates. The problem, as the Urban Institute’s Eugene Steuerle puts it, is that “matching contributions will be successful only if workers can afford to take advantage of them, and many low- and very low-income workers cannot or do not.” Even the Gore plan’s own sponsors predicted low participation among the poor.

Personal accounts for Social Security, by contrast, let low-wage workers save part of the payroll taxes they already pay. Under proposals from President Bush’s reform commission, a young low-wage worker could accumulate $70,000 by the time he retired. The account would supplement traditional Social Security benefits, paying a higher total retirement income than the insolvent current program even promises, much less can afford to pay. Moreover, unused funds could be passed on to a spouse, children or a charity of the worker’s choice.

Wealth building is particularly important to minorities. In 1998, the median African American household held only $3,060 in financial assets, one-sixth that of the households in general. The median Hispanic household held only $1,200.

The non-financial benefits to personal accounts - more stable households, better health, and better educational outcomes - are often overlooked in the larger Social Security debate. But they should not be. Policymakers must address the fact that Social Security promises benefits far in excess of what it will be able to pay, and reform could involve painful and controversial choices. But these choices will be easier when Americans realize that solutions incorporating personal retirement accounts can help build more stable families and prosperous neighborhoods for the future.

Andrew G. Biggs is a Social Security analyst at the Cato Institute and was a staff member for the President’s Commission to Strengthen Social Security.