Saturday, May 14, 2005

To those who oppose any meaningful reform of the Social Security system, I say fine. You can keep the system, but just let me out. I am perfectly willing to take my chances with a personal investment account.

I am willing to take this chance despite the chorus on the left warning of the dangers of personal accounts and assuring us Social Security offers a “guaranteed” benefit.

I am willing to take this chance because the alleged “danger” of the personal investment accounts and the supposed “guaranteed” nature of Social security have both been wildly exaggerated by reform opponents.

As for market dangers, the average real rate of return since 1926 has been more than 7 percent. Even in the market’s worst 20-year period, which included the Great Depression, it still dramatically outpaced the meager 1 percent to 2 percent return one could hope from Social Security in the best case.

As for the so-called “guaranteed” benefit of Social Security, the only thing it seems to guarantee is regular benefit cuts, via higher taxes or increases in the retirement age, and that those who die before retirement age forfeit all contributions.

Some argue Social Security is meant as a safety net, not a primary source of retirement income. This may have been true in 1937 when the payroll taxes funding Social Security were 2 percent. However, now that those same taxes are 12.4 percent many workers have little if any discretionary income remaining for retirement savings or investment. If the present system is to take 12.4 percent of a worker’s wages, it has a moral obligation to provide much more than a “safety net.”

I am also willing to take a chance on a personal account because we don’t have to speculate how such a system might work over time. We already know. We only need look at the 5 million to 6 million teachers and public employees who have been allowed to opt out of the Social Security system to see how they have fared compared to those forced to participate in Social Security. Of course, the fact you never hear any of these same teachers or public employees clamoring to get in the Social Security system is really all you need to know.

Ironically, the National Education Association, which strongly opposes letting most American’s benefit from personal retirement accounts, vigorously opposes any attempt to force teachers with personal retirement accounts to participate in Social Security. On its Web site, the NEA, states:

“Mandatory (Social security) coverage would weaken existing state and local retirement plans that often offer benefits superior to Social Security.” (emphasis added).

If anything, the NEA understates the superior performance of these state and local investment-based retirement plans. For example, the Galveston Texas plan invests only in assets with a fixed rate of return. A worker can expect retirement benefits 2 to 5 times what Social Security would have provided.

Teachers in Ohio, California, Massachusetts and other states who have opted out of the Social Security system enjoy a similar advantage over workers who have been forced to remain in the Social Security system.

Not all these “opt out” retirement systems follow the same model. Some are defined benefit plans, and others are defined contributions. Some conservatively invest in the stock market; others select only investments with a guaranteed return.

However, the one thing they have in common from San Diego, Calif., to Boston, Mass., from Anchorage, Alaska, to Galveston, Texas, is they all soundly beat the present Social Security system. The debate now should not be whether to reform Social Security but rather on which state or local retirement systems we should model the new Social Security system.

Still, to those who insist no reform is needed other than perhaps increasing taxes, I say fine. If you believe staying with the current system makes sense, then by all means do so. However, just stop the train long enough for me to get off. In 20 years, we can meet over a cup of coffee and compare bank statements. Oh, and don’t worry, the coffee’s on me.


Fredericksburg, Va.

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