For all his talk of a new politics of change and unity across partisan lines, Barack Obama said last week that as President he would deny working people the freedom to choose a better deal for Social Security. No real change for that program, adopted over 70 years ago, following the model adopted by German Chancellor Otto von Bismarck in 1889.
Indeed, Obama even voted against legislation to stop the longstanding raid on the Social Security trust funds. The supposedly old and stodgy John McCain, however, voted for the legislation to stop the raid, and supports allowing each worker the freedom to make their own choice regarding personal accounts.
This reveals yet again the sad truth about Barack Obama. Despite all of his empty rhetoric, he supports no change whatsoever from the liberal left welfare state adopted in the 1960s, and even the 1930s, based on the cutting edge social theories of the late 19th century. Instead, what he really wants is to go back to the old, outdated policies of those bygone eras with a rigid vengeance
McCain has supported the modern, truly progressive idea of personal accounts for Social Security, which has been adopted in some form in at least 30 countries around the world since Chile first did so with astounding success in 1981. Each worker would be allowed the freedom to choose to put at least some of his taxes in a personal savings and investment account that would accumulate returns over the worker’s lifetime. In retirement, benefits from the account would substitute for a proportionate share of current Social Security benefits, depending on how much in taxes the worker is allowed to shift into the account over his working years. This would relieve at least some of the financial burden on Social Security, which everyone knows is unable to pay all of its promised benefits to today’s workers.
But even worse than Social Security’s projected long-term financial collapse is that the program is no longer a good deal for today’s young workers. Even if the program could somehow pay all of its promised benefits to these workers, those benefits would still represent a low, below market return on the huge taxes workers and their employers must now pay into the program over each worker’s career.
This has been shown in studies, books, and articles I and others have done for the Cato Institute, the Heritage Foundation and others. It also has been shown in the real world in Chile and elsewhere. The best summary of this work is that for most workers today, even if Social Security could somehow pay all of its promised benefits, the real rate of return paid by the system would be 1 to 1.5% or less. For many, it would be zero or even negative. The actuarial value of all promised Social Security benefits was included in these studies.
A negative real return is like putting your money in the bank, but instead of the bank paying you interest, you pay the bank interest for holding the money. This is what Barack Obama says we must not change. Thank you for that innovative insight, Barack.
OF COURSE, IF TAXES are raised or benefits cut to close the long-term financial gap of Social Security, the rate of return paid by the program will become worse, pushing more and more workers into the range of negative returns. Under the current system, this is where Obama would lead all working people, in the name of the glory of maximum dependency on government.
By contrast, the long-term real return on stocks, going back close to 100 years, is 7% or more. The long-term real return on corporate bonds has been 3.5%. Compounding a lifetime of investment at these returns as compared to the miserable returns Social Security even promises today, let alone what it can pay, would make an enormous difference for working people.
Social Security performs so poorly for workers today because it is completely a tax and redistribution system, with no real savings and investment anywhere. Close to 90% of the funds paid into the system each month are immediately paid out to finance the benefits of current workers. Even any surplus left over is lent to the Federal government and spent on other government programs. Without any investment, the system does not produce any investment returns to advance the prosperity of workers over the long run.
In 2005, Rep. Paul Ryan (R-WI) and Sen. John Sununu (R-NH) introduced the most advanced and comprehensive legislation for personal accounts ever developed. The bill would allow workers to contribute to the accounts roughly the employee share of the Social Security payroll tax. But it included a progressive feature that would allow lower income workers to contribute somewhat more while limiting higher income workers to contribute somewhat less, so that the gains would be roughly equivalent for all workers.
Workers would choose investments from a list of alternative investment funds managed by top private sector firms, all approved by the government for this purpose, and regulated for safety and soundness. So workers do not have to be investment experts to succeed. They just need to pick one of the approved funds, where proven industry leaders would maximize diversification and other investment strategies. This is precisely the system that has worked so well in Chile and elsewhere, with many workers with little sophistication or experience in investment.
LET’S LOOK AT AN AVERAGE income two earner couple that invests in the Ryan-Sununu personal accounts over their entire careers. With half invested in stocks and half invested in bonds earning the standard long-term returns discussed above, they would reach retirement with close to $700,000 ($668,178) in today’s dollars, as calculated in a study I produced for the Institute for Policy Innovation. This fund would be enough to buy an annuity paying them about 60% more than Social Security even promises, let alone what it could pay. Investing two-thirds in stocks and one third in bonds, they would reach retirement with over $800,000 ($829,848) in today’s dollars. That would be sufficient to pay them over twice what Social Security promises but cannot pay. All of this with just half the total payroll tax invested in the accounts.
Now let’s take the case of a single low income worker who earns little more than the minimum wage over his entire career. Investing in a Ryan-Sununu personal account each year half in stocks and half in bonds, and earning standard long-term returns, he would reach retirement with over a quarter million ($271,505) in today’s dollars. That would be enough to finance an annuity that would pay him 84% more than Social Security promises but cannot pay. If the fund was invested two-thirds in stocks and one-third in bonds earning standard long-term returns, then he would reach retirement with $347,827 in today’s dollars, which would be enough to pay him well over twice what Social Security promises but cannot pay.
Workers would own this money, personally and directly. They would be free to leave some of it, or all of it, to their families and children. Every worker in the economy would own a share of America’s business and industry. The ownership of financial wealth would be far more equal throughout our society. The new savings and investment flowing through the personal accounts, and the reduced payroll tax burden, would cause an economic boom that would create new jobs and increase the wages of workers today. This would all be nothing less than a revolution in the personal prosperity of working people.
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