- The Washington Times - Wednesday, February 2, 2005

The liberal response to President Bush’s call for Social Security reform is to argue preposterously there is nothing wrong with the current system. Try telling that to single retirees, who will on average receive a pitiful monthly benefit from the program this year of only $920.

That reflects a fundamental problem that demands immediate, fundamental reform. The problem is that Social Security is no longer a good deal for working people today.

Of course, Social Security is going bankrupt, contrary to the nonsense liberals like Paul Krugman are arguing. That means in the future Social Security will not even be able to pay the equivalent of $920 today.

But that is only half the problem. The other half is that even if Social Security could pay all its promised benefits, those benefits now represent a low, below-market return on the taxes workers and their employers pay into the system. Workers would get much higher returns and benefits if they could save and invest their payroll taxes in personal accounts.

Studies by the Cato Institute, the Heritage Foundation and others show that, for most workers today, the real rate of return Social Security would pay, counting all of the promised benefits, is 1 to 1 percent. For many, it would be zero or even negative. A negative return is paying a bank to hold your money rather than receiving interest.

In contrast, the long-run real return in the stock market going back before the Great Depression is at least 7 percent to 7 percent, and arguably more. The long-run real return on corporate bonds has been 3 percent. For a lifetime of savings and investment, this adds up to an enormous difference in benefits that could be paid to working people.

This is illustrated by the legislation introduced by Rep. Paul Ryan, Wisconsin Republican, and Sen. John Sununu, New Hampshire Republican. Their bill would allow workers on average to invest in personal accounts just over half of the total payroll tax of 12.4 percent, or roughly the employee share of the total tax.

An average-income, two-earner couple with such an account over their entire careers investing half in stocks and half in bonds and earning only standard long-term market returns would retire with a personal account of about $670,000 in today’s dollars. That account would be sufficient to pay them about 60 percent more in benefits than Social Security now promises them, let alone what it can pay.

If the couple invested two-thirds in stocks and one-third in bonds, which is the default option under Ryan-Sununu, at standard market investment returns they would reach retirement with a fund of about $830,000 in today’s dollars. That fund would be sufficient to pay them about twice what Social Security promises today.

Or take a low-income worker who earns today’s equivalent of $20,000 yearly. Investing in a Ryan-Sununu account over his entire career, with half in stocks and half in bonds, he would reach retirement with an accumulated personal account fund of about $270,000 in today’s dollars. That could pay him about 80 percent more than Social Security promises but cannot pay.

If he invested two-thirds in stocks and one-third in bonds, he would reach retirement with a fund of about $350,000 in today’s dollars. That would be enough to pay him over 100 percent more than Social Security promises, but cannot pay. All this can be found in recent studies published by the Institute for Policy Innovation.

This analysis shows as well why cutting future promised Social Security benefits through such proposals as price indexing are a bad idea. Price indexing would freeze benefits at today’s levels in real terms forever. With payroll taxes continuing to grow with wages, the miserable rates of return paid by Social Security would worsen every year, eventually pushing everyone well into the negative range.

The problem with Social Security is not that benefits are too high but that they are way too low. That is one reason why we need personal accounts now: For every day that goes by, more and more workers are further locked into the bad deal the current system imposes on them.

Peter Ferrara is a senior fellow with the Institute for Policy Innovation and director of the Social Security Project for the Free Enterprise Fund.

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