- The Washington Times - Tuesday, June 6, 2000

Al Gore says the personal ac-count option for Social Security supported by George W. Bush is just too risky.

But the question to ask is risky compared to what? The Supreme Court has ruled that Social Security benefits are not government guaranteed. Congress has the power to reduce them at any time. With Social Security facing a huge financial crisis after the Baby Boom retires, future benefit reductions are likely without more basic reforms.

In other words, you have no property rights in Social Security. All you have are political promises. With personal accounts, by contrast, you are building personal assets under your personal ownership and control. Which is more risky?

Moreover, even if Social Security somehow pays all of its promised benefits, studies produced by the Cato Institute show that for most young workers today the effective real rate of return paid by Social Security will be 1 percent or less. For many it will be zero or even negative.

By contrast, the real rate of return paid by corporate stocks over the past 75 years has been around 7.5 percent. The long-term return paid by corporate bonds has been around 3 percent. Yet, at just a 4 percent real return earned on a diversified portfolio, an average income couple exercising a full personal account option would retire with more than 3 times the benefits Social Security promises (but cannot pay, according to government reports).

Just how risky is a personal account option when, at just above half the average return in the stock market over the last 75 years, the average worker would retire with more than 3 times the benefits? Even when the stock market is way down, workers would still receive much more than Social Security promises.

The personal accounts would pay far more for lower-income workers as well, even though the Social Security benefit formula favors these workers. In "A New Deal for Social Security," Michael Tanner and I offer the example of a husband and wife entering the work force in 1985 who each earn the equivalent of the minimum wage throughout their careers.

With a full personal account option, at just a 4 percent real return this low income couple would retire with about $375,000 in today's dollars. That fund would pay about 2.5 times what Social Security promises them, but, again, cannot pay under current projections.

With a personal account option for just a part of the program, as Mr. Bush proposes, the accounts would similarly pay workers 2 to 3 times the Social Security benefits they replace, or more. With such a huge margin for error, this is not a risky proposition.

In addition, any personal account system would include a safety net, as in all the other countries that have already adopted such accounts. That safety net should provide for a guaranteed minimum benefit equal to what Social Security would have paid. If for some reason the worker's personal account is not sufficient to keep the worker's benefits at least equal to what Social Security would have paid the worker without the personal account, the government would make up the difference. Such a guarantee is feasible again because the personal accounts are so likely to pay so much more than Social Security.

A sound system would also be structured to make the personal account investments easy for unsophisticated investors, as in the many other countries around the world that have already adopted such reforms. Workers would pick a major investment company from a list approved and regulated by the federal government. That investment company would then pick the particular stock and bond investments for the workers. Self-direction options with more direct personal control would be available for more sophisticated investors.

An excessive concern over risk foreclosing personal accounts would actually harm working people. For workers would then be unnecessarily denied the much better returns and benefits they would get through private investment. It is quite unseemly for high-income professionals enjoying the greatest bull market in world history with their 401(k)s, IRAs, stock options, etc. to proclaim that it is just too risky for lower-income working people to have a real chance to participate as well.

The bottom line is that some self-appointed elitist should not be making this choice for working people. Workers should each be free to decide for themselves whether they think the risks and rewards of personal accounts are worthwhile. That is all that George Bush, and John McCain, and Bob Kerrey, and Pat Moynihan are proposing.

Peter J. Ferrara is associate professor of law at George Mason Law School and a senior fellow at the Cato Institute.

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