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| Briefing Book |
| White House Conference |
Americans for Tax Reform1320 18th Street, NW, Suite 200, Washington, D.C. 20036PHONE: 202-785-0266 - FAX: 202-785-0261
Statement of Peter J. Ferrara The biggest problem for Social Security is not that it is inevitably headed for bankruptcy. The biggest problem is that even if it somehow pays all its promised benefits, it has become a bad deal for working people today, depriving them of the vastly greater prosperity they would enjoy if they could save and invest their funds through the private sector instead. Take the example of a husband and wife entering the work force in 1985, each earning the average income each year for their entire careers. Projections in A New Deal for Social Security, a new book from Cato I co-authored with Michael Tanner, show what would happen if this couple could save and invest in the private sector what they and their employers would otherwise pay into Social Security. At a 4% real return, which is just over half the average return earned in the stock market over the last 70 years or so, the couple would retire with almost $1 million in today's 1998 dollars. That fund would pay them more out of continuing investment returns alone than Social Security promises, but cannot pay, while allowing them to leave the almost $1 million to their children. Or the funds could be used to buy an annuity paying them over three times what Social Security promises, but cannot pay. At a 6% real return on investment, the couple would retire with $1.6 million in today's dollars. That fund would pay them about 3 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 7 times what Social Security promises, but cannot pay. The book shows that the same is true for all workers today 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 all would receive much higher benefits saving and investing in the private sector through individual accounts rather than Social Security. Even low income workers who receive special subsidies through Social Security would receive much more in benefits from the personal investment accounts. Take the example of a low income couple with 2 children. Husband and wife enter the work force in 1985 and each earn the equivalent of today's minimum wage each year throughout their careers. Through the personal investment account, at a 4% real return, the couple would retire with a fund of $375,400 in today's dollars. The couple could use this fund to buy an annuity that would pay them about 2.5 times (2.44) what Social Security promises but cannot pay. Or the couple could use part of the find to buy an annuity matching what Social Security promises, while leaving $220,000 to their children. At a 6% real return, this low income couple would retire with a trust fund of almost $700,000 ($693,395) in today's 1998 dollars. That fund would pay them more than twice (2.26 times) what Social Security promises out of the continuing returns alone, while allowing them to leave almost $700,000 to their children. Or they could use the funds to buy an annuity that would pay them about 5 '/2 times (5.46) what Social Security promises but cannot pay. These vastly greater benefits would result not because the private sector would make better investments than Social Security. They result because Social Security makes no real investments at all. Social Security is a tax and redistribution scheme where almost all taxes paid today are immediately paid out to current beneficiaries on a pay-as-you-go basis. 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. The huge advantage for private investments leaves plenty of room for the risk of poor market performance for sustained periods. Even at the returns earned during the worst periods of market investment performance, workers would retire with much higher benefits than Social Security promises but cannot pay. This analysis also leaves plenty of room for administrative costs, which market data shows would be less than 50 basis points. No reform plan can be supported that makes Social Security an even worse deal for today's workers. Any tax increase or benefit reduction to address Social Security's long term financial problems would do that. The only way out is to allow workers a personal investment account option for at least part of Social Security. Instead of paying more and getting less, such an option would allow workers to pay less and get more. Such a system can be designed to make Ml market investment returns accessible even for unsophisticated workers. Workers would simply pick a major investment firm from a list of firms approved and regulated by the government. These firms would then pick the particular investments for the workers. Denying working people a personal investment account option to Social Security deprives them of the till economic value of their earnings. For what they and their employers are paying into Social Security now, they would get 3 to 6 times the benefits through a personal investment account, at just standard or even below average market investment returns. Forcing working people to lose these benefits is not progressivism. Such an investment account option is most important for lower income workers. These workers cannot afford higher taxes now or lower benefits in retirement. They most need the higher benefits that would result from the private savings and investment. Workers around the world are increasingly enjoying the freedom to choose personal savings and investment accounts for part or all of Social Security. Why not American workers? As a lifelong Republican, I commend President Clinton for putting this issue at the top of the national agenda.
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