September 19, 2002
By Alfredo Goyburu
Critics of President Bush's Social
Security reform plan sure have it easy these days.
All they need do, it seems, is point
to the ups and downs -- well, mostly downs -- of the stock market.
That's all it takes to confirm the folly of investing in personal
retirement accounts, right? Like Al Gore said when he ran for
president in 2000, it's a "risky scheme."
So what if Social Security is going
broke? That it promises most workers entering the system today less
than a 2 percent return on the money they will pay into it?
That every relevant demographic trend works against it?
Better the proverbial "lockbox" than a "risky scheme," nervous
members of Congress figure. At least "lockbox" sounds
The problem is, it's not.
By the time the first of 77 million baby boomers begin retiring in
2011, barely more than three workers will be around to support each
retiree -- down from 16 per retiree in 1950. That means those
workers will have to start forking over bigger "contributions"
(read: higher payroll taxes). By 2017, Social Security will begin
taking in fewer dollars from taxes than it pays out in benefits.
After 2043, absent a massive cut in benefits or hike in taxes,
it'll be broke.
The Commission to Strengthen Social Security, appointed by
President Bush, studied three plans for personal retirement
accounts. All would allow workers the option (that's right, folks,
it wouldn't be mandatory) of investing a small portion of their
annual income in long-term, low-risk accounts. If the accounts
prove profitable, workers would receive higher monthly retirement
benefits. In the highly unlikely event they don't, benefits would
be cut only by the amount they've deposited into their personal
In short, no one would be wiped
The commission's researchers found that, under the commission's
second plan, which would allow workers to invest up to 4 percent of
their gross income or $1,000 per year, monthly retirement benefits
for medium-income workers would rise by an average of 18
percent by 2032 -- and 59 percent by 2052. Why so much?
Because the market always pays better over the long run than
Social Security does.
words are"long run." A long-term, buy-and-hold investment program
is what the president proposes. No one with fewer than 10 years to
go until retirement would be eligible for personal accounts, and
most workers would contribute to them for 30 years or
Standard & Poor's 500 (S&P), the index that measures the
stock prices of large companies, has gained every 20-year period
since it began in 1926. It even climbed 1.1 percent through the
heart of the Great Depression -- 1929 to 1938. The short-term
hiccups -- even the 25 calendar years in which the S&P fell,
including the six when it fell more than 20 percent -- are more
than outweighed by the market's overall upward climb.
The S&P has gone up for the year
51 times since it was first established. It has averaged a 7
percent annual gain over the last 75 years, and it never has had a
30-year period in which it did not gain at least 4.4 percent. In
fact, seven 30-year periods since the S&P was created had rates
of return of more than 9 percent.
Meanwhile, today's typical 35-year-old
man, with average earnings for his age group, can expect to "earn"
a minus 0.3 percent return on his Social Security retirement taxes,
according to Heritage Foundation Social Security expert David John.
That means after paying about $282,000 in taxes over his career,
this man can expect only $262,000 in benefits -- a $20,000 loss.
His 32-year-old wife would do better, but the typical rate of
return for women this age -- 1.9 percent annually -- is still far
below even what the most conservative investments would pay. (A
simple savings account can outperform that.) And it's only going to
Social Security may have provided a warm blanket for Americans at
the height of the Great Depression. But the blanket now has some
holes. Something has to change. President Bush hasn't proposed a
"risky scheme." What's risky is doing nothing and hoping our
children somehow can solve this problem for themselves.
Goyburu is a policy analyst in the
Center for Data Analysis at The Heritage Foundation
(www.heritage.org), a Washington-based public policy research
Distributed nationally on the Knight-Ridder Tribune wire.
Critics of President Bush's Social Security reform plan sure have it easy these days.
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