Under such reform, workers would have the freedom to choose to direct part of their Social Security payroll taxes into their own personal Social Security investment accounts. They would choose a major investment company to invest their funds, with scope for self-direction of investments for sophisticated investors who desire it. In retirement, the benefits payable through the accounts would replace part of their Social Security benefits.
Later, the option would be expanded to cover more and more of Social Security. A safety net would ensure that no worker would receive less with a personal account option than what Social Security promises. All the while, there would be no change in Social Security benefits for today’s retirees or those who choose to forgo the personal accounts and stay on Social Security as is.
If these personal accounts were adopted and expanded quickly enough, we would avoid the long-term financial problems of Social Security. Otherwise, the government’s own reports indicate payroll tax increases of 40 percent to 80 percent would eventually be needed to pay all benefits promised to today’s young workers.
But Social Security faces a far bigger problem than its financial difficulties. Even if the program somehow pays all its future promised benefits, it is no longer a good deal for today’s workers. These workers would now get far higher returns and benefits through personal retirement accounts.
In A New Deal for Social Security, we offered the example of a young, two-earner, average income couple paying into such a personal account over their entire careers what they and their employers would otherwise pay into Social Security. At a 4 percent real return on investment, which is just more than half the average return earned in the stock market over the last 75 years, they would reach retirement with almost $1 million in today’s dollars. That fund would finance an annuity paying them 3 times what Social Security promises but cannot pay. Indeed, the continuing investment returns alone would pay more than Social Security promises, while allowing them to leave the $1 million to their children. This analysis took into account survivors benefits, disability benefits, and administrative costs, and showed how the transition to such a new system could be financed without undermining these benefits.
These better benefits are most important for lower-income workers. Even for a couple with two career minimum-wage earners, personal accounts earning a 4 percent average real return would pay more than twice what Social Security promises. In contrast, on our current course lower-income workers will be saddled with higher payroll taxes, lower benefits, or both, none of which they can afford.
Personal Social Security accounts give low- and moderate-income workers their only chance to participate in the capital markets. Upper-income workers are riding the capital market boom through 401(k)s, individual retirement accounts (IRAs), stock options, etc. But the lower half of income earners is missing out, as they do not have the funds to make significant capital investments. As a result, they are falling farther and farther behind. With personal Social Security accounts, by contrast, the result would be a more equal distribution of wealth and income.
The personal accounts would produce much higher benefits because Social Security’s pay-as-you-go financial structure does not make any significant capital investment. Social Security is just a tax and redistribution scheme, not an investment program. The private, invested system, by contrast, pours its funds into real, private, capital investment that produces new income and wealth. That increased income and wealth is what finances the far higher returns and benefits of the private system.
Yet, in his presidential announcement speech, Mr. Gore said he would “never” support such reform, charging lamely that personal accounts would “undermine” and “destroy” Social Security. This position has been echoed throughout his campaign. But quite to the contrary, it is Mr. Gore’s refusal even to consider personal accounts that is undermining and destroying Social Security for future generations.
Personal Social Security accounts are not just pie-in-the-sky theory. Workers in more and more countries around the world are already successfully investing through such accounts. In Chile, rural peasants wearing serapes and roaming the hills with burros have their retirement funds invested worldwide by American firms such as Citicorp. Last year, these workers earned a 17 percent real return on average on their personal account investments.
Al Gore would deny this same choice to American workers. Instead, Prince Albert would impose his view on all Americans, slamming the door on Social Security freedom and prosperity.