March 7, 2005 | Commentary on Department of Homeland Security

The Future of Social Security

In his State of the Union address, President Bush made it clear that Social Security reform would top his domestic agenda this year. But it might be a hard sell for younger Americans. Conventional wisdom holds that for anyone under 40, retirement security is low on our list of priorities.

However, a closer look shows that as a group, we favor (in both perception and practice) the sort of Social Security reform the president is proposing.

For starters, a national poll conducted by Quinnipiac University in January found that more than two out of every three Americans under 40 do not "expect Social Security benefits to be there for them when they retire." Nor do we expect Social Security to be much help even if we receive it. Only one in 10 "Generation X'ers" expressed strong confidence that Social Security could meet their financial needs when they retire.

Further, more than two thirds of young people believe that Social Security is either a "crisis" or has "major problems." Maurice Carroll, director of the Quinnipiac University Polling Institute, says, "The Social Security generation gap shows younger voters have lost confidence in the system." Young people simply do not believe there is anything "secure" about the system.

As a result, more and more of us have begun investing in personal retirement accounts to provide financial stability when we retire. Carroll says young people want to build a nest egg of their own, and nearly 60 percent of us support investing a portion of our Social Security in the stock market to do so.

And why not? We would be much better off if we did. According to The Heritage Foundation Social Security Calculator, under the current system a 25-year old male can expect a payment of roughly $2,600 per month when he retires. If allowed to invest his Social Security in a personal retirement account that earns about five percent, he could receive more than $8,700 every month.

Younger workers don't fear the stock market; we're embracing it. About half of the 35 million Generation X households already own some type of personal retirement account, such as a 401(k), 403(b), IRA, etc. To these investors, the current "guarantee" of Social Security is simply not seen as a viable option for anyone seeking long-term financial stability.

Sen. Harry Reid, D-Nev., has likened the president's proposal to a gamble. "It's more like Social Security roulette," he claimed. Of course, the smart money says personal retirement accounts are a very safe bet.

Over long periods of time, stock market investments prove extremely secure. There has never been a 20-year period in which stocks lost money, and this is significant because retirement funds are usually held for several decades.

Generation X'ers already have invested more than half a trillion dollars in personal retirement accounts, the typical account having more than $30,000 in it. It's hard to imagine that the 17 million families who own these accounts feel that they are simply rolling the dice. In fact, they leave the money in these accounts because, over the long term, they're seeing growth.

On the other hand, Social Security is neither profitable nor guaranteed. Its rate of return is awful. For younger workers it's actually negative, meaning they'll invest more than they'll ever get back out. Even for those who will come out ahead, the rate of return is worse than an old-fashioned passbook savings account.

The experts agree that in order to maintain the current system in coming decades, Congress will eventually have to both raise taxes and cut benefits -- unless it allows younger workers to create personal accounts that would grow over time and generate wealth.

That's why, for young workers, President Bush's Social Security reform only builds upon what we already know to be true: Personal retirement accounts are the path to achieving real security in our old age.

Kirk Johnson, is a senior policy analyst and Brian Phillips, is a media-relations associate at The Heritage Foundation, a Washington-based public policy research institute.

About the Author

Kirk A. Johnson, Ph.D. Visiting Fellow
Center for Data Analysis

Brian Phillips Media Relations Associate

Distributed nationally on the Knight-Ridder Tribune's Campus Wire