Who would benefit from Social Security reform? Opponents like to talk about a windfall for Wall Street fat cats, but that's just a red herring to divert our attention from the real issue. The real beneficiaries would be working-class and middle-class Americans.
Right now about half of working Americans are participating in the growth of the American economy through investments in stocks, bonds, and mutual funds. But about half are not. And it's the latter half -- mostly those who make less than the median income -- who would benefit from Social Security personal accounts. At last they would be able to build a nest egg of their own, instead of just relying on Social Security for their retirement. And they'd have something they could leave to their children or grandchildren.
Dramatically more Americans own financial assets now than in the recent past. As recently as 1980, only 4.6 million U.S. households owned mutual funds; by 2003 the number was 53.3 million. More than half of American families currently own stocks, bonds, or real estate. Nearly half of all U.S. households own stocks or stock mutual funds.
But not all households are participating in the stock market. "The majority of working Americans have not benefited directly from the rise in stock prices," says Stephen Brobeck, head of the Consumer Federation of America. "In fact, more than half of all households hold no stock."
Among people with annual household incomes of $75,000 or more, 84 percent own stocks or stock funds; among those with incomes less than $30,000 stock ownership is only 26 percent. White households had an average net worth of $468,200 in 2001, more than six times the $75,700 of black households.
That's why Social Security personal accounts would mean so much to low-income families. If you make a modest income, it's not easy to put 12.4 percent of your income into Social Security and save more on top of that.
We should let workers up to age 55 have the option of putting their Social Security taxes into personal accounts, which they could invest in stocks, bonds, mutual funds, or other financial assets. Rep. Sam Johnson (R-Tex.) and a dozen other members of Congress propose to allow workers to divert the entire employee's half of the Social Security payroll tax -- or 6.2 percent of wages -- into individually owned, privately invested accounts.
Younger workers who chose the individual account option would receive benefits substantially higher than those that could be paid under traditional Social Security. At the same time, the plan would allow low-income workers to accumulate real wealth.
Workers who chose the individual account option would forgo future benefits under traditional Social Security, but they would receive a bond in recognition of their past contributions to Social Security. That bond, to be cashed in at retirement age, would be calculated to provide a benefit based on accrued benefits under the current Social Security system as of the date that the individual chose an individual account.
Under that plan, workers would build a real nest egg for their own retirement. And every worker could afford to do it. Low-income workers are already being forced to put 12.4 percent of their earnings into a Social Security system that promises them a low rate of return, and can't even pay what little it promises. They would be much better off if they could put that money into their own account and earn a more comfortable retirement.
A personal account would give workers more income in retirement. But more importantly, it would give them ownership, control, and inheritability. Instead of paying taxes for 40 years and then hoping that Congress would raise taxes on the next generation to pay the promised benefits, workers would have their own money in their own account, an account that would belong to them. Within some limits, they could control how the money is invested, and how they withdraw it in retirement. And workers could leave the money they had saved to their children.
Those who worry about the "wealth gap" in America should be strong supporters of personal accounts. Lower-income Americans can't close the wealth gap unless they can save. Social Security accounts would make it much easier for them to do so.