As a 27-year-old, the last thing on my mind these days is old age. I want to travel, ride with the top down on my convertible, and flirt as much as possible. But like most young workers I have to plan for my future, especially since it's possible that part of my retirement -- my Social Security check -- won't be there.
This isn't mere pessimism talking. When FDR signed the Social Security Act in 1935, there were about 30 workers paying payroll taxes to support every one retiree. Payroll taxes in 1939 were 2 percent (the employee's and employer's share combined) on the first $3,000 of earnings. Today there are only three workers supporting every one retiree, and the combined payroll tax is 12.4 percent on the first $72,600 of earnings.
It's important to understand how Social Security's "trust fund" works. My payroll taxes aren't being deposited in an account -- they're being used to pay current retirees and finance other government programs. When I retire, the only way the government can pay me is through the payroll taxes it collects from future workers. The trust fund is actually filled with government IOUs. It's like parents using their children's college savings for vacations while stuffing IOUs in a piggy bank. Where will the money come from when it's needed?
Worse, I'm paying into a system that won't give me a favorable return on my money. To find out what I would collect under Social Security, I requested my Personal Earnings Benefits Statement from the government. I then asked one of my Heritage Foundation colleagues to examine how much I will contribute to Social Security over my lifetime and figure out how much I would make if that same amount were invested in a simple portfolio of blue-chip stocks and government bonds. The result: My portfolio would pay me $143,803 more than Social Security will -- hardly an insubstantial sum.
And I'm not alone. A recent Heritage study calculated Social Security benefits for each congressional district for dual-income married couples born in 1965. CDA found that the highest rate of return, in North Dakota, is a dismal 2.4 percent. The average is about half that amount, and some workers will actually get back less than they paid into the system.
Can the current system be saved? There are the usual ideas for reform -- raising the retirement age, cutting benefits, increasing the payroll tax -- but none is a long-term solution and all are politically unwise. Why not allow workers take a percentage of their payroll taxes and put it in private accounts they would manage? As with 401(k) plans, workers would have several funds to choose from and would have ownership over that fund when they reach retirement.
Some critics object that the market is unpredictable and risky. But its average rate of return -- 11 percent -- dwarfs the average rate of return for Social Security. And many people do better than that. Last year, I earned 33 percent on my retirement investments, and most of them are moderate risk.
As a presidential candidate in 1964, Barry Goldwater was considered crazy to advocate private accounts. Today there is a strong constituency behind privatization, which has gone global. Countries that have private accounts for their workers now include Hong Kong, Chile, Australia, Britain, Mexico, Denmark and El Salvador. Even socialist Sweden is implementing private accounts funded through payroll taxes. Yet the United States continues to lag behind.
The fact that reform plans for Social Security are being debated in Washington is certainly progress. But unless they are followed up with action -- and soon -- most workers will never get the opportunity to see how much more money they could earn for retirement. Better keep those travel brochures locked up.
Sara Fitzgerald is the former manager of lectures and educational seminars at The Heritage Foundation, a Washington-based public policy research institute.