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It's great to be in New York. The financial capital of the world. The "capital of capital." The epicenter of economic exuberance. And it's great that we're talking about how we expand the opportunities and treasures of our economy to as many American workers as possible. About what kinds of policies can help enrich people's lives.
Officially, this is a public pension gathering, but really this is a summit on wealth creation. I guess you could say that this, right here, right now, is Alan Greenspan's worst nightmare. Too much wealth!
Today, at the dawn of a new century, on the eve of a new millennium, we are witnessing a fundamental shift -- a seismic shift -- in the American economy.
The Internet is empowering the individual and is expanding opportunities for peace and prosperity -- in unimagined ways -- like no invention since, what -- some say the steam engine, others say even the wheel.
No longer are American workers simply concerned with wages and salaries; they are increasingly interested in saving and investing in the process of wealth creation. And it is this new respect for the power of capital -- human capital, social capital, financial capital -- to produce growth that is the driving force not only in the global economy but also at the kitchen tables of millions of American families.
The New Economy has opened the door for a whole new generation of investors - - almost half of all American adults are now participating in the new prosperity as shareholders of stocks and bonds or through their pension funds.
Until just recently, the stock markets were seen to be something only for the elites. In the 1960s, only about one in ten Americans owned stock in publicly traded companies. It just didn’t seem accessible to most Americans. But all that’s changing dramatically. And it’s not the same old crowd. Record numbers of women and young people and minorities are getting involved and the numbers are growing all the time.
The Dow Jones Industrial Average, the Nasdaq Composite, the S&P 500, and the Russell 2000 all ended 1999 at record highs. For the year, the Dow was up 25.2 percent, the Russell increased 19.6 percent, and the S&P gained 19.5 percent. But the Nasdaq led the way with an amazing 85.6 percent appreciation, more than doubling its strong 38.6 percent return in 1998.
Main Street is taking over Wall Street. It’s exciting. Expanded access to the stock markets, 401(k) plans, mutual funds, IRA’s and other investment opportunities are helping workers become owners. Wealth is being created in every part of this country by working men and women who had never previously considered the possibility that they could own a stake in the company they work for, or in an innovative Internet startup, or in a blue chip corporation. And when people have more than just their own paycheck – when they own a stake in something bigger than themselves – what they really own is a stake in America.
That’s good news – but it’s not nearly enough. We still have a long way to go. While stock ownership has expanded dramatically in America, far too many are still being left out of this new prosperity. Millions and millions of Americans are forced by the government to put thousands of their hard-earned dollars each year in a “stock” that will never pay profits or dividends. That stagnant, disappointing “stock” is our nation’s Social Security system.
Social Security, of course, was originally designed to save older Americans from poverty, and for years it did just that. And it will continue to do so for today's retirees. But for today's working families, Social Security comes up short. That’s why Baby Boomers are increasingly anxious about their retirement security. So are women, who tend to live longer than men and need to be assured they will have enough to live on when they retire. [African-American families are especially hard-hit because black males tend to die younger, and so we find they've worked a lifetime and paid hundreds of thousands of dollars in Social Security taxes. But their wives and children receive little in the way of benefits when they could be left with substantial assets earned with lifetime of labor.] So are young people who are getting punished by sky-high payroll taxes and who doubt they will ever see a Social Security check when they retire.
In 1937, the Social Security tax was 2 percent of the first $3,000 earned. Today, the Social Security tax is 12.4 percent of the first $72,500.
But I believe the problems facing our Social Security system are actually a source of great opportunity – an opportunity to spread ownership and harness the markets to deliver increased retirement income for every American worker. No one should be left behind. Every one should be free to experience the miracle of the markets. Everyone should have an opportunity to harness that force Albert Einstein called the most powerful in the universe: compound interest.Imagine an America early in the next century where every working man and woman is empowered with an ownership stake in the economy. An America where the ladder of opportunity reaches not only the boundless heights but also extends all the way down to the bottom so that families who begin with nothing can eventually climb all the way to the top. In other words, imagine America not just as a constitutional republic, but as a vibrant shareholder democracy where everyone not only has a vote but also owns property.
The primary obstacle to that possibility is the current structure of the Social Security system that prevents low-income workers from transforming their labor into capital. In a democratic capitalist system that succeeds in giving people access to capital, owners of capital and workers are not different people, but the very same people at different stages of their lives. As we think about what the nation's retirement policy should be in the 21st century, we have an incredible opportunity to put Social Security to work transforming the labor of every man and woman in America into capital. Instead of forcing workers to put 12.4 percent of their wages and salaries into a government-run, pay-as-you-go retirement plan, which short-circuits their ability to save and which leaves them dependent on government for their retirement, why not give them the opportunity to invest their payroll tax payments in their own personal retirement accounts? Why not seize this opportunity to create an America where capital is abundant and each and every one of our citizens has a shot at the American Dream? The American Dream is not confined to one class or one color or even one nation. It is the most powerful force for economic growth, wealth creation, and emancipation in human history. I believe that with the right policies, we can look forward to the promise that poverty as a permanent condition can be overcome not in the distant future but during our lifetime.
So, how do we save and strengthen Social Security? How do we encourage not just retirement security but retirement prosperity? How do we create this new shareholder democracy?
Let me be clear about something right at the outset. Economic growth is the key to the long-term health of Social Security and Medicare. And economic growth is essential for us to make the transition to the new shareholder democracy I have mentioned. It’s simple. Without higher economic growth than is currently projected, we cannot save Social Security and Medicare, and we cannot transform our nation’s retirement system into one of opportunity and wealth accumulation. That is why, above all else, we need a bold growth agenda, not a laundry list of legislative proposals, tax credits, and development banks.
We need tax reform, and we need to empower people to save and accumulate wealth.
While stronger economic growth could eliminate much of the long-term Social Security financing problem, growth alone is not enough. The demographic problem is so great that even a continuation of growth above 3 percent a year would only delay for a decade—until 2022 or thereabouts—the time when Social Security payroll tax revenues cease to cover all benefits. But that decade's worth of breathing room is vital. That’s why in order to make up for the rest of the projected shortfall in Social Security we also need to begin this year to allow workers to direct a substantial portion of their payroll taxes into personal investment accounts similar to Roth IRAs.
There is a second reason why we must begin the transition to investment-based private funding for retirement. Even if it were possible to maintain the pay-as-you-go, tax-and-transfer New Deal structure of Social Security, why would workers want to? Certainly, the pay-as-you-go tax-and-transfer system is not required for the government to maintain an adequate retirement safety net for all Americans.
Even if we could solve all of Social Security’s financial problems without dramatically changing its structure, we would still be left with a system that pays benefits too small to justify the high FICA tax rate. That is, even if we right the program’s financials, Social Security still fails on the rate-of-return question. The fundamental truth is that not even higher economic growth will make Social Security an acceptable deal in terms of the rate of return to the taxpayer. Because of its high-tax/low-rate-of-return structure, the current system denies many citizens, especially lower-income Americans, the opportunity to invest, accumulate real wealth, and achieve not just retirement security but retirement prosperity. Moving towards a personalized, investment-based system could go a long way towards erasing the class divisions that still divide us in these otherwise prosperous times.
Middle-aged taxpayers send 12.4 percent of their wages to Washington in exchange for Social Security benefits equaling a 1 or 2 percent real rate of return. Today’s young workers do even worse, with some actually paying more into the system than what the government promises to pay back during their senior years. This means that for certain groups of citizens—like young, single black males—the government mandates an investment with a negative real rate of return.
Currently, Social Security’s inflation-adjusted rate of return is only 1.23 percent for an average household [assumes two, 30-year-old earners with children in which each parent made just under $26,000 in 1966]. Such a couple would pay [including employer share of tax] a total of about $320,000 in Social Security taxes over their lifetime. They can expect to receive benefits of about $450,000 in 1997 dollars before applicable taxes when they retire at age 67.
Had this couple placed that same amount into a conservative tax-deferred IRA investment such as a mutual fund invested half in Treasury-bills and half in equities, they could expect a real, inflation-adjusted rate of return equal to 5 percent. By retirement they would have accumulated $975,000.
The rate of return for minorities is actually negative because of lower life expectancy. For example, single black males born after 1959 will get back only about 88 cents for every dollar paid in payroll taxes.
That’s not just bad economics, it’s immoral. It points out the real reason to privatize Social Security: Today, Social Security usurps individual freedom and initiative, fosters dependence on government, yields workers an unacceptably and nnecessarily low rate of return, and provides unnecessarily small retirement benefits (although, ironically, more than the program as presently structured can afford). Personal accounts have an added advantage in that they comprise real assets that can be passed on, in tact, to spouses and eventually to other loved ones—unlike the current system in which a widowed spouse under 60 receives a one-time death-benefit payment of $255 and a reduced monthly benefit. This feature is just one more positive factor in building a system that is good for families, not just good for the economy.
A new, fully funded system would also eliminate the possibility of future actuarial imbalances brought about by demographic aberrations, like the baby boom, that are inherent in any tax-and-transfer program. When every American owns real assets, demographics become irrelevant.
As significant as increasing retirement income and stabilizing Social Security’s financials are, we cannot fail to appreciate how dramatically personal retirement accounts will change America’s cultural and socioeconomic landscapes.
I can’t think of a better way to directly move capital from Wall Street to Main Street, and from the government to the people, than to allow each worker to become a saver, an owner, and indeed, a capitalist—with personal retirement accounts. If we don’t change Social Security, we are locking many of our urban and minority citizens in an economic cage. The FICA tax, which for many is more oppressive than the income tax, prevents them from breaking free. If we insist on the status quo, we are telling them that our highest goal is to promise them a pitifully small return because we don’t want to subject them to the risks of the American economy. All the while, these urban and minority citizens are watching from the sidelines as their fellow Americans get rich. I mentioned that almost half of all American households, that's about 100 million households, now own stock in publicly traded corporations, either directly or through pension funds. These investors have greatly benefited during the stock market’s extended bull run. But what about those for whom the payroll tax is an effective prohibition on saving and investing? What about those who have not been able to participate in our nation’s broader prosperity?
The Great Emancipator Abraham Lincoln said: “I take it that it is best for all to leave each man free to acquire property as fast as he can. Some will get wealthy. I don’t believe in a law to prevent a man from getting rich; it would do more harm than good. So while we do not propose any war upon capital, we do wish to allow the humblest man an equal chance to get rich with everybody else. When one starts poor, as most do in the race of life, free society is such that he knows he can better his condition; he knows that there is no fixed condition of labor for his whole life. I am not ashamed to confess that twenty-five years ago I was a hired laborer, mauling rails, at work on a flatboat—just what might happen to any poor man’s son. I want every man to have a chance.”
With the Emancipation Proclamation and the Homesteading Act in 1862, then that same year the Morrill Land Grant College Act, Lincoln's leadership offered a combination of property ownership, entrepreneurial opportunity, and vision that any poor man in America should be able to own his own land and climb the ladder to what we call, loosely, the American Dream.
Today, in the information economy, our challenge is not a scarcity of land, but of capital. Unfortunately, today’s Social Security system locks capital away from lower-income men and women in a way that land was locked away in the agrarian economy. Today’s Social Security system keeps them from getting rich. We should adopt Lincoln’s philosophy and emancipate people from poverty by freeing up capital.
Remember, benefits build dependence; assets build hope. If even a small portion of Social Security were personalized, the proportion of stock ownership will rise from roughly 50 percent of the adult population to 80 or 90 percent.
When I was HUD Secretary, I always talked about how important ownership is. When people own their homes, as opposed to renting subsidized public housing units, they take care of their investment. And they take better care of the neighborhood, too. In the same manner, if every American owned stock, if they had a stake in the broader American economy, each of them would demand policies from their government that encourage opportunity and growth. This is the virtuous cycle at work.
We may decide to start small by allowing workers to dedicate just a few percentage points of the payroll tax to these personal accounts. But I envision a day in the not too distant future where individuals may voluntarily dedicate every dollar of his or her payroll-tax contribution to their personal retirement account, and to private life and disability insurance policies.
Here are the principles that should guide us as we modernize and personalize Social Security…
1. Guarantee all promised benefits to current and near-term beneficiaries. First and foremost, we must fully protect the current Social Security system for those on it and those going on it in the next 10 to 15 years. Millions of Americans have made retirement decisions based on the contract of the current system. We absolutely must protect them. That means no benefit cuts. Promises made must be promises kept.
2. Give all workers the opportunity to generate increased retirement income and build personal assets by investing a significant portion of their payroll taxes in personal retirement accounts.
3. Give workers freedom of choice to remain in the current Social Security system or choose the new Personal Retirement Account system.
4. Maintain a federal safety net, guaranteeing that each worker’s retirement income under the new system would be no less than what Social Security would pay.
5. Address and ultimately solve Social Security’s long term financing challenges without tax increases. Making the transition to a fully-funded system and moving the economy onto a higher long-run growth track will help us avoid the program’s predicted cash flow problems.
6. Avoid imposing additional administrative costs on employers, particularly small businesses.
7. Adopt pro-growth tax and regulatory policies that will increase the rate of return on the Personal Retirement Accounts and smooth the transition to a new system.
None of the presidential aspirants this year has put the whole package together. George W. Bush understands the importance of growth in the economy and has offered a pro-growth tax cut (it's small, but it's a start). Bush has failed, however, to make the case for personal retirement accounts. John McCain, on the other hand, entirely neglects the importance of growth but does mention in his stump speech his plan to allow workers to invest a portion of their Social Security taxes.
But both candidates continue to believe, erroneously, that debt retirement somehow strengthens Social Security. It does not. Repeat that 3 times to yourself. It does nothing to strengthen Social Security -- it only retards economic growth beneath what we could achieve if those surpluses were used to overhaul the tax code and returned to workers to invest in the private economy.
So each candidate has gotten it about 25 percent right -- together, they've gotten it about half right.
But half-right is not enough. Social Security is sure to be an issue -- a major issue -- this fall, and the party of freedom and opportunity cannot be left without a bold and confident plan for the nation's retirement system.
I think it's imperative that the Republican nominee blend and expand the best points of the Bush and McCain economic plans -- growth and ownership -- and discard the status quo rhetoric of debt-retirement and austerity. If we are to have a positive, winning message on Social Security in the fall campaign, we must emphasize both strong economic growth and personal retirement accounts -- both of which require tax reform. This is the only way to stay on offense and take an issue that has been an historic liability and turn it into a vote-getting asset.
Right before our very eyes is the biggest empowerment issue we've seen in years. Real Social Security reform could lead to the greatest expansion of ownership and wealth for working families that America has ever seen.
There are those who believe that the poor can never escape poverty and become rich, or at least richer. But to be rich in America, as Abraham Lincoln said, means to be rich in opportunity. I believe Americans are looking for leaders who believe in helping people create personal wealth – not redistribute it.
Our national ambition should be to create a Shareholder Democracy for the 21st century in which every working man and woman not only has a vote but also owns property, where each citizen can look forward not just to retirement security but retirement prosperity. A new, personalized Social Security system would ensure better returns on the money workers and their employers pay into the system, it would promote individual wealth creation and ownership, and it would allow each of our citizens—especially women, the poor, and minorities—to participate in America’s economic success.
Let's seize this chance to make every working American a financially independent pioneer in the economy of the 21st century. This is the next step in the journey of American capitalism.