- The Washington Times - Thursday, June 21, 2001

President Bushs Social Security reform commission met for the first time last week. Calm, reasoned and brave, they began to consider how to design a personal account option for Social Security, which is truly the most progressive idea on the national agenda today.
Progressives have expressed great concern in recent years over a growing "wealth gap" in America. The top half of income earners have been riding the long-term capital market boom through IRAs, 401(k)s, stock options, etc. But those among the lower half of income earners are missing out, as they do not have the funds to save for such investments. As a result, they have been falling farther and farther behind, and the distribution of wealth and income is becoming more unequal.
A personal Social Security investment account option gives lower income earners their chance to participate in the capital markets as well. With the bottom half of income earners accumulating substantial capital for the first time, wealth and income distributions would become far more equal. Indeed, calculations done years ago by Harvard Professor Martin Feldstein indicate that shifting completely to personal accounts would reduce the national concentration of wealth by 50 percent.
Far more concretely, the personal accounts would produce far higher returns and benefits for lower income workers. In "A New Deal for Social Security," Michael Tanner and I offer the example of a low income, two-earner couple who each earn the equivalent of the minimum wage each year throughout their careers. Suppose they could save and invest in a personal account what they and their employers would otherwise pay into Social Security.
After accounting for the survivors and disability benefits of Social Security, assume that with their funds handled by a major investment firm along with the funds of many other workers, the couple earns a 4 percent real return on their retirement investments. This is just over half the average return earned in the stock market over the last 75 years, and a modest return on a mixed portfolio of stocks and bonds.
The couple would reach retirement with a trust fund of about $375,000 in todays dollars, after inflation. The couple could use this fund to buy an annuity paying about 2.5 times what Social Security promises but cannot pay based on the governments own projections.
At a 6 percent real return, which is still less than the average stock market return over the last 75 years, the couple would retire with a trust fund of almost $700,000 in todays dollars. That fund would finance an annuity paying them about 5 times what Social Security promises but cannot pay. Indeed, the fund would pay more than what Social Security promises out of the continuing investment returns alone, while still allowing them to leave the fund of almost $700,000 to their children.
Perversely, Social Security promises an even worse deal for black-Americans. Because of their lower life expectancies, they tend to live fewer years in retirement to collect benefits, resulting in even lower returns. A black male born today has a life expectancy of 64.8 years. But the Social Security retirement age for that worker in the future will be 67 years. That means probably the majority of black males will never even receive Social Security retirement benefits.
The Heritage Foundation took this into account in a groundbreaking study calculating promised Social Security returns for black-Americans. This study found that the promised Social Security return for a low-income single black male age 30 today is a negative 0.66 percent. This is like paying the bank for holding your money, rather than receiving interest.
In sharp contrast, the real rate of return paid by stocks over the last 75 years has been about 7.5 percent. The real return on corporate bonds has been around 3 percent, or more. An investment portfolio with half of each would earn about 5.5 percent.
With the personal accounts, this negative effect on blacks can be avoided. Organizations like the NAACP can offer investment programs and annuities to their members that take into account their lower life expectancies. Retirees can also use only part of their funds to buy an annuity matching what Social Security would pay, and keep the rest in reserve to use as they choose, leaving any remaining funds at death to their children. Those who die before retirement can also leave their account funds to their families.
Finally, through personal accounts the socialist dream of the nations workers owning its business and industry would be effectively achieved. But as this ownership would be direct, rather than through the government, the result would be more appropriately called worker capitalism.
Workers in other countries around the world are already earning increased benefits through such personal account options. Polls consistently show that a substantial majority of American workers believe that they would get increased benefits from such personal accounts as well. Self-appointed left-wing elitists who would deny them this choice are not benefiting, or truly representing, the working people of America.

Peter Ferrara is a senior policy adviser to Americans for Tax Reform on Social Security and research director of the For Our Grandchildren Campaign.


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