- The Washington Times - Saturday, April 9, 2005

Albert Einstein once called compound interest the greatest power in the universe. Only through personal retirement accounts can the power of compound interest be fully engaged in rescuing Social Security from insolvency. And it is foolish to consider reform without incorporating that power.

Workers’ payroll taxes do not earn interest credited to their accounts because, as funds are paid into the system, they are paid out again almost immediately to current Social Security recipients. It would be far better for workers to invest in broad market index funds or bond funds, or a combination.

President Bush has proposed allowing workers to invest 4 percent of their taxable wages in personal accounts. That’s not enough. At an annual income of $30,000, for example, 4 percent personal accounts would not build up enough principal to yield an annual payment equaling current Social Security benefits, or about $15,000. They would fall short of current benefits by about 10 percent. If we wanted to guarantee the current benefit level as a minimum, the personal accounts would need to be supplemented by withdrawals from the Social Security Trust Fund to make up for the 10 percent shortfall.

Although this would reduce the financial strain on the present system, it doesn’t solve the problem permanently. However, once personal accounts are funded with approximately 6 percent of wages, the twin goals of permanent solvency and meaningful benefit increases are realistically achievable.

Were the wage earner permitted to invest the full 6.2 percent worker’s share of FICA in a personal account, while the existing Social Security system continues receiving the full 6.2 percent employer’s share, the system will become permanently solvent. That also means that it will remain solvent regardless of the ratio of workers to retirees — the very problem that created the system’s current predicament.

Our first responsibility in designing responsible Social Security reform should be to secure the financial independence of the lower-income worker who may rely entirely on Social Security for retirement income. At the present benefit level, someone who has earned $30,000 yearly throughout his working life will receive about half that amount, or $15,000 per year, from Social Security, plus cost-of-living increases. By comparison, if the same person invested the full worker’s share of FICA in a personal account earning 6 percent annual interest, he could retire on a guaranteed annuity income of more $25,000 a year, indexed for inflation, not only during the worker’s life, but also throughout life of a spouse who outlives him.

That’s more than 80 percent of the worker’s annual wages — a much better deal. Even if the personal account earned a more conservative 5 percent instead of 6 percent, the guaranteed annual income available from the personal account would remain about $20,000, or one-third more than the present Social Security benefit. Further, that worker would not need 1 cent from the “traditional” Social Security system, which would then be free to fund transition costs and guaranteed benefits for the truly poor, those whose earnings are below poverty level. Their benefits could actually be raised so they would be better off than under the current system.

Two critical components of true Social Security reform are: permanent solvency for the system and improved benefits for retirees at all earnings levels. Let’s not settle for less.

John M. Templeton Jr., M.D., son of the legendary global investor Sir John Templeton, is chairman of Let Freedom Ring, a conservative public policy foundation promoting constitutional government, economic freedom and traditional values.

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