- The Washington Times - Wednesday, March 23, 2005

Some very important retirement income issues have been lost in the fire and smoke belching out of the Social Security reform debate lately.

One is the power of compound interest through private investment to produce increased wealth for workers over their working lives. The other is the loss of most if not all of one’s tax payments to Social Security for those who die early in their retirement, a problem especially acute among black Americans.

The case of Alex N. Dragnich, a retired Vanderbilt University professor who likes President Bush’s idea of a voluntary personal Social Security accounts, illustrates the first point. It also tells us a lot about how long-term investing dissipates risk.

When Mr. Dragnich joined the Vanderbilt faculty in 1950, he and other teachers took part in a retirement plan managed by the Teachers Insurance and Annuity Association (TIAA). TIAA later set up the College Retirement Equities Fund (CREF), whose investment earnings would rise and fall with equities markets. Under the plan, teachers could put up to 50 percent of their pension contributions into CREF, later boosted to 75 percent. “I elected the largest permitted amount,” he said.

“When I retired 20 years ago, my income from CREF was not as good as that from the annuity and I cursed those who created CREF,” he said. “But as the market crept up (remember when the Dow had not reached 1,000?), my CREF income increased phenomenally, far exceeding annuity earnings.”

“Of course, CREF returns fell considerably in the depression years of 2001-2003 [in the stock market]. But last year’s modest recovery resulted in a CREF monthly increase this year of nearly $700,” he said.

Yet even in the market’s 2001-2003 down years, his monthly income from CREF “was more than 2 times what it would have been had I left all my money in the annuities part.”

The professor’s CREF experience is as a case study for Mr. Bush’s plan to let workers invest some of their Social Security payroll taxes in similar broad-based, diversified, low-risk stock and bond funds. The flat annuity fund, minus cost-of-living-increases, serves as a metaphor for the fixed returns available under Social Security.

In 1990, Mr. Dragnich’s monthly income from his CREF investments yielded him $1,129. By 2000, his monthly check had risen to $3,689. It dipped in the next few years of the market’s decline, but in 2004, was $2,511 monthly. This compares to a flat $1,027 in his risk-free annuity plan.

All told, his investment income over the last 15 years has grown twice as fast as his annuity. The lesson of this comparison, says the professor, is “we should not forget the cumulative gains of long term investments” — that lie at the heart of Mr. Bush’s personal retirement accounts.

The second lesson comes from Alvin Williams, a black political leader and the president and chief executive officer of Black America’s Political Action Committee, who worries that millions of black families lose much of the money they pour into Social Security because actuarial tables show that on average they die at earlier ages than whites.

“An African-American high school graduate who earns middle-income wages for the next 45 or 50 years will pay more than $700,000 in Social Security taxes. But because of his lower life expectancy, he will probably collect only about $140,000 in Social Security benefits after he retires,” Mr. Williams says. “This is a loss of over half a million dollars.

“This grim reality will affect 7 out of every 10 African-Americans,” he said. “They will receive less in Social Security benefits after they retire than they paid in Social Security taxes during their working years.”

Mr. Williams offers this bleak statistic: Half of all 20-year-old African-American men who enter the labor force will die before they get back even three years’ worth of Social Security benefits, the National Center for Health Statistics says.

This is a much more serious problem than most blacks fully understand. Tragically, it has not drawn much attention in the debate over reforming the system, as Mr. Bush proposes, to build inheritable, assets-based wealth the government cannot take away and workers can leave their families when they die.

A disproportionate share of black American workers have low incomes, making it difficult if not impossible for most to save and invest for their retirement years to accumulate the higher yields from 401(k) plans higher-income people have.

Inexpiably, the leaders of most black and Hispanic organizations oppose Mr. Bush’s plan, saying it is too risky and their constituencies too poor to participate.

But when I ask about their retirement plans, all are invested in some diversified mutual fund of their own and many boast of its growth over the years. It’s not too risky for them.

Mr. Bush wants younger black and Latino workers to have the same opportunity to invest in the U.S. economy and financially benefit from its long-term growth — like everyone else.

Donald Lambro, chief political correspondent of The Washington Times, is a nationally syndicated columnist.

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