Do-it-yourself Social Security Reform

COMMENTARY Social Security

Do-it-yourself Social Security Reform

Oct 11th, 2000 2 min read

Former Senior Research Fellow in Retirement Security and Financial Institutions

David is a former Senior Research Fellow in Retirement Security and Financial Institutions.
To hear Vice President Gore tell it, allowing Americans to invest part of their Social Security taxes in personal retirement accounts is about as safe as juggling hand grenades. But while he and George W. Bush debate how to reform the program, millions of Americans are taking matters into their own hands.

Tired of waiting for politicians to act, they are buying Series I U.S. Savings Bonds, a special type designed specifically for retirement savings. And with good reason: Average-income workers in their 30s will earn twice as much from these bonds as they will from Social Security, which-absent reform-is looking like less and less of a sure thing all the time.

Take my friend George, who was born in 1970. His retirement check from Social Security is supposed to total about $1,310 a month. That's hardly a princely sum, but there's no guarantee he'll draw even that much. Social Security's own numbers show the program will be collecting enough in taxes to pay him only $947 a month the year he retires.

The remaining $363 a month will have to come from some other source. The question is where.

Assuming that Congress doesn't cut benefits between now and the day George retires, there are only two ways to pay George the extra $363 a month. One is to raise the payroll taxes levied on his children and other future workers. The other is to slash health, defense, education or other social programs to pay George-and millions of his contemporaries-what Social Security has promised them.

Imagine, on the other hand, if George was able to put a portion of his existing Social Security taxes into some form of personal retirement account and avoid this problem. Because his invested taxes would earn far more than Social Security can afford to pay him, it will help make up the difference-and then some.

Series I U.S. Savings Bonds are one type of investment that would fit perfectly into a Social Security personal retirement account. They are super safe, have no administrative charges, and pay fairly high interest. Currently, these bonds pay 7.49 percent interest, and are guaranteed to pay 3.6 percent interest plus inflation throughout their 30-year life.

On top of that, just about everyone can afford them. Series I Bonds can be bought in amounts ranging from $50 through $10,000. Their convenience, low cost and safety have caused the sale of these bonds to grow from about $30 million a month two years ago to about $200 million a month today.

It would make perfect sense to include these bonds in a Social Security personal retirement account, but there are other low-cost ways to invest. Federal government employees, for example, today can invest their payroll taxes in a savings plan that offers a government bond fund, a corporate bond fund and a stock index fund-all safe and low-cost options.

There are also more than 5 million state and local government employees who are not part of Social Security. Their retirement plans vary, but for the most part, they earn more than they could get from sending the same money to Social Security. Not surprisingly, these workers show no desire to shift to Social Security.

The chance to earn a higher rate of return is the main reason attacks on Social Security plans that would let people invest a portion of their taxes have failed. American workers would rather have some control over their futures, rather than simply trust the federal government to provide for them. Despite heavy-handed warnings about "risky schemes," Social Security reform remains popular among Americans at all income levels.

Which makes sense, considering that Social Security itself must now be classified as a "risky scheme." After 2015, the program can't afford to pay everything it has promised. The choice is having more personal control over your retirement or trusting the same people who are even now making promises they can't keep. Looking at recent bond sales, it's clear many Americans have already made that choice.

David John is a senior policy analyst at The Heritage Foundation (, a Washington-based public policy institute.

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