Well, we are all investors now.
After weeks of telling the American people that investing in private capital markets is a "risky" game of "Wall Street roulette," Vice President Al Gore has now unveiled a proposal for Social Security reform containing a plan to encourage low-income workers to invest more for their retirement. Although it is good that the vice president has belatedly recognized the importance and safety of market investment, his proposal falls far short of what is needed to reform Social Security.
Indeed, Gore's proposal is not actually a Social Security reform proposal. It is the illusion of reform, without the substance. It would not extend Social Security's solvency by as much as one day, or increase the program's rate of return by as much as 1 percent.
Gore has suggested using projected federal budget surpluses to pay down the national debt. He would then credit interest savings from eliminating the debt to the Social Security Trust Fund, thereby extending the life of the fund on paper. The key words here are "on paper." The Gore plan is nothing more than a bookkeeping gimmick. It would increase the amount of IOU's in the trust fund, but it would not provide the resources to pay those debts when they come due.
Nor would Gore's plan solve any of Social Security's other problems. Young workers would still receive a ridiculously low rate of return from Social Security. Those workers would still be paying 12.4 percent of their income (the largest single tax paid by most Americans) into a system that promises them a return of less than 2 percent. In fact, many young workers can actually expect a negative rate of return -- less back in benefits than they pay in taxes. Compare that with an average annual return from private markets of nearly 8 percent over the past 75 years. Gore's proposal keeps Social Security's poor return in place.
Nor, under the Gore plan would workers have any legal ownership of their Social Security benefits. The Supreme Court has ruled that one has no contractual or property right to Social Security benefits in return for paying Social Security taxes. Social Security benefits are politically determined, meaning they can be changed or cut at any time. Workers who play by the rules and pay their taxes must depend on the whims of politicians for their retirement benefits. Gore does nothing to give workers ownership of and control over their retirement money.
His plan does attempt to address one of Social Security's problems, but even here it falls short. America is becoming increasingly divided between those who can afford to save and invest and those who cannot. Social Security exacerbates this problem. Because workers do not own their Social Security benefits and because those benefits are not inheritable, low-income workers are not able to accumulate real wealth or leave an estate to their heirs.
Gore would rectify this problem by creating new incentives for low-income workers to save and invest outside the Social Security system. He would offer them as much as $3 in government matching funds for every dollar they save. Yet the Gore plan is unlikely to help many low-income workers.
It is not lack of incentives that prevents low-income workers from saving; it is lack of income. After a low-wage worker pays for food, rent and so on -- including 12.4 percent of his income in Social Security taxes -- there is simply no money left over to invest. According to a survey for the Employee Benefits Research Institute, more than 40 percent of low-income workers said they could not afford to save an additional $20 a week. Studies of company 401(k) plans show that fewer than 40 percent of workers earning under $15,000 per year participate, even with generous matching contributions. Thus, rather than helping low-income workers build wealth, the Gore proposal will simply create a new entitlement program for the middle class. The poor will simply go on paying their taxes into a failing Social Security system.
Gore's proposal for Retirement Savings Plus accounts does make two concessions: that market investment is safe and that individual accounts are technically feasible. But he still resists the next logical step, allowing workers to invest their Social Security taxes. That would really give low-income workers the chance to accumulate wealth. Moreover, it would give workers ownership of their retirement money, freeing them from dependence on politicians, and would increase the rate of return, leading to higher retirement benefits. That would truly solve Social Security's financial problems once and for all. Now that would be a plan for Social Security reform.