Future power of personal accounts

White House advisers tell me President Bush’s re-election campaign will focus on America’s security: strengthening the United States against foreign terrorists and battling economic weakness at home.

Certainly, no president in recent memory has had a stronger record of accomplishment in battling terrorism. Barring another attack on U.S. soil, it will be his most powerful vote-getting issue.

The economy is Mr. Bush’s weakest issue. The gross domestic product is growing but at an snail’s pace — maybe less than 2 percent, while unemployment has climbed to 6.4 percent.

But Mr. Bush has a tax-cut plan that seems to be turning the economy around: The stock market has been bullish overall in anticipation of stronger growth; corporate earnings have improved; housing sales are soaring (with the help of historically low interest rates); and incomes are up.

Still, a key indicator is consumer spending, which is still tight as cautious wage earners wait to see which direction the economy, and employment numbers, will turn in the months ahead.

One economic issue Mr. Bush will run on is reforming Social Security. His plan, which could be the sleeper issue of 2004, would let workers invest part of their payroll taxes to increase their financial resources far beyond what Social Security will pay them. But because other issues are currently in the spotlight — namely tax cuts, postwar Iraq and Medicare reform — this topic isn’t getting as much attention as it should.

But individual Social Security retirement accounts will likely get much more of the spotlight next year when Mr. Bush seeks a mandate for his unfinished agenda. Already, a group of Republican reformers is pushing a new, more ambitious proposal that is just what is needed to boost Mr. Bush’s plan.

Designed by economist Peter Ferrara for Americans for Tax Reform, the plan calls for letting workers invest 5 percentage points of their payroll tax in stocks and bonds. This is much more than the 2 percentage points (of a worker’s 12.4 percent payroll tax) that the Bush plan envisions at the outset.

The debate over how much workers will be allowed to invest will come soon enough when Congress takes up this issue, hopefully within the next few months. But what is especially intriguing in Mr. Ferrara’s paper are numbers showing how much more workers stand to gain.

“Let’s take the case of an average income worker age 40 today who earns $35,000 per year,” says Mr. Ferrara. “He entered the work force at age 23, earning $17,677 per year then, and earns only the average salary increase each year.”

His calculations assume a diversified portfolio of half stocks and half bonds, and an average annual real return of 3 percent for bonds and only 7 percent for stocks, for an average annual return of 5 percent on the entire investment.

In this case, the worker would retire with a total accumulated trust fund of $334,095 in today’s dollars after adjusting for inflation. “That would be enough to pay an annual annuity about 70 percent more than what Social Security promises, but cannot pay, or $2,653 per month compared to $1,567,” Mr. Ferrara says.

“With the account invested entirely in stocks and earning standard market investment returns, the worker would retire with a fund of $576,761, paying him $5,186 per month in today’s dollars,” says Mr. Ferrara. “This would be well over 3 times what Social Security promises.”

The results are potentially greater in the case of a two-earner household. Both wage earners enter the work force at age 23. One earns $20,202 that year and the other earns $15,152, with each earning an average salary increase annually. If they used the full personal account investment option at the start of their working careers, this couple would retire with a total fund of $668,178. That would pay them 60 percent more than Social Security at $4,987 per month vs. $3,133.

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