- The Washington Times - Thursday, May 3, 2001

President Bush is moving full steam ahead with his plan to let workers put a small portion of their Social Security payroll taxes into their own personal investment accounts.
The presidential commission Mr. Bush established yesterday has been given its marching orders and a short time-frame in which to complete its mission. It has been charged with producing, by fall, a legislative plan that Congress can use to partially privatize Social Security.
Mr. Bush is asking the commission to stick to these guidelines: Benefits for retirees and near-retirees cannot be reduced. Payroll taxes must not be increased. Participation in personal retirement accounts must be voluntary. The Social Security surplus must be used only for Social Security. The government must not be allowed to invest in private markets.
Mr. Bushs purposes are twofold.
His first is to save Social Security, which faces bankruptcy in 15 or 20 years, when a tsunami of retiring Baby Boomers begin drawing benefits. Unfortunately, not enough workers will be paying taxes into the trust fund to support the massive increase in retirement checks. This is a system that will be groaning under the weight of its impossible, unfulfillable financial promises.
But Mr. Bush is doing something else here that is quite revolutionary. He is proposing that we begin chipping away at the last cornerstone of the New Deals welfare state for very sound fiduciary reasons. It is a lousy deal that has been denying hard-working Americans the higher financial returns on their money that they could have been getting decades ago.
He is proposing that we let ordinary workers create a great deal more wealth over their working lives through the power of reinvested compound interest, dividends and capital gains.
To achieve this, he wants to let workers put between 1 percent to 2 percent of their payroll taxes into safe, IRA-style accounts that invest in a broad basket of stocks or rock-solid U.S. Treasury bonds, or a combination of the two, in what are known as balanced funds.
The result: Workers who sign up for this new program will be getting a dramatically higher return on investments they would control, and which they could leave to their heirs.
How much more? "Studies show that, over time, a mixed portfolio of half stocks and half super-safe government bonds earns an average of 5 percent a year," says David C. John, senior Social Security analyst at the Heritage Foundation.
"This compares to Social Securitys average 1.2 percent annual real growth for an average 30-year-old working family," Mr. John says in a recent memorandum circulating on Capitol Hill.
"Even Series I U.S. Savings Bonds earn 3.4 percent after inflation" and would outperform Social Security, he says.
Of course, workers who choose to put some of their taxes into a stock portfolio that invests in blue-chip, S&P; 500 stocks can earn much more than this over their careers anywhere from 7 percent to 12 percent a year on average, and in many cases much more. Compound that over a 45-year career, and we are talking about a substantial nest egg.
For example, imagine that in 1953 a worker invested $9,000 in the Washington Mutual Investors Fund. This fund, which invests only in blue-chip stocks, is one of the lowest-risk funds in the pension industry. By the year 2000, that $9,000 would have grown to $4.1 million, delivering an annual compound rate of more than 13.5 percent.
There were those who predicted that this years volatility in the stock market would undermine public support for Mr. Bushs proposal. But Americans are much more knowledgeable about investments today. They know they will come out way ahead in the long run, despite the ups and downs of the market.
But Mr. Bush will face enormous obstacles in Congress, which is terrified of changing a politically popular program. If he thinks that getting his tax cut through Congress has been hard, the battle over reforming Social Security is going make that exercise look like a walk in the park.
If he succeeds, the Social Security system is going to be relieved of an insupportable burden, and the huge wealth gap between upper-income and lower-income Americans is going to shrink dramatically.
Think of it. Millions of workers who do not now own stocks or bonds will become investors and owners of the American economy. And that is going to sharply increase demands to further reduce taxes on income and capital gains. No wonder the Democrats are so opposed to it.

Copyright © 2018 The Washington Times, LLC. Click here for reprint permission.

The Washington Times Comment Policy

The Washington Times welcomes your comments on Spot.im, our third-party provider. Please read our Comment Policy before commenting.


Click to Read More and View Comments

Click to Hide