Clinton defenders argue that there will be more private savings to raid after 2013 if we start using the surplus to buy bonds for Social Security now. Even if that were true, the massive drawdown of private savings that will occur for decades once Social Security is in deficit will still rightly be seen as quite harmful to the economy during that time.
Moreover, Clinton’s plan does not even address the biggest Social Security problem of all. Even if Social Security did somehow pay all its promised benefits, the program would still be a very bad deal for today’s workers. These workers would now get much higher returns and benefits paying into personal investment accounts rather than into Social Security.
To see just how bad this problem is, take this example from the Cato Institute’s new book, A New Deal for Social Security, written by Michael Tanner and myself. A husband and wife, each age 22, enter the work force in 1985. The husband earns the average income for male workers each year and the wife the average income for female workers each year. They raise two children.
Suppose they could save and invest in a personal account what they and their employers would otherwise have to pay into Social Security. Some of the money is set aside each year to buy private life and disability insurance covering the same survivors and disability benefits as Social Security. The rest is devoted to retirement investment.
Suppose those investments earn just a 4 percent real rate of return over the years, which is just over half the average return earned in the stock market over the last 75 years, going back before the Great Depression. By retirement, the couple would have a fund of almost $1 million in today’s dollars. That fund would pay them more out of the continuing investment returns alone than Social Security promises but cannot pay, while allowing them to leave the $1 million to their children. Or the fund could be used to buy an annuity paying them more than three times what Social Security promises but cannot pay.
At a 6 percent real return, which is still less than the average stock market return, the couple would retire with $1.6 million in today’s dollars. That fund would pay them about three times as much as promised by Social Security, while allowing them to leave the entire $1.6 million to their children. Or it would finance an annuity paying them seven times what Social Security promises but cannot pay.
The same is true for all workers of all income levels, family combinations and ethnic groups — rich or poor, black or white, married or single, with children or without, one-earner couple or two-earner couple. They would all get several times what Social Security promises, but cannot pay, through private investment accounts, even at below-average investment returns. Even low-income workers who receive special subsidies through Social Security would receive much more in benefits from personal investment accounts.
Some argue that such private investments would be too risky for workers. But if at half average stock market returns workers would get more than three times the benefits, workers would get much more than Social Security even when the markets were weaker than usual. Moreover, personal account reform plans include very low-risk investment options such as money market funds and insurance products. In any event, workers who thought the private accounts too risky would be free to stay in Social Security.
But an excessive and unwarranted concern over risk harms rather than helps working people. It unnecessarily deprives them of the much higher benefits and wealth their payroll taxes could support if invested through a carefully structured system of personal retirement accounts.