Stock Market Roulette or Snobbery?

Copley News Service, 5/12/2000

One of the great debates of our time is whether it is possible for America to become a shareholder democracy in which all workers can own assets and build wealth for their retirement years, or whether they will have to settle for the meager rate of return they presently can expect from Social Security. Will workers be permitted to invest at least a portion of their payroll tax contributions into personal retirement accounts, or will they be forced to pay higher taxes to keep Social Security afloat?

Next week, Gov. George W. Bush will reveal his plan to allow all workers to place a portion of their Social Security taxes into personal accounts. Vice President Al Gore has called the idea “stock market roulette.”

The fact is the pay-as-you-go, tax-and-transfer retirement program we call Social Security is a New Deal relic that is irreparably broken as currently configured. First, it is a bad deal for today’s workers, yielding a 30-year-old, two-earner couple who earn average incomes a measly 1.23 percent real rate of return on a lifetime of taxes paid into Social Security.

Second, the Social Security system is so financially unsound that it soon will not even be able to pay this return to workers. By 2015, there won’t be enough workers contributing payroll taxes at current rates to support all of the retirees eligible to receive Social Security benefits.

In fact, if no changes are made to the program today, by 2034 Social Security will be able to pay only 71 percent of promised benefits, and in order to pay them all, the current payroll tax rate (12.4 percent) will have to increase intolerably to more than 18 percent. By 2070, the tax rate would have to rise to almost 20 percent to prevent benefits having to be cut.

As long ago as 1996, President Clinton acknowledged that “we are going to have to do something” to deal with the looming collapse of Social Security. He suggested raising the retirement age, cutting Social Security benefits and having the government directly invest in the stock market to increase resources available to pay benefits. Although he did not support allowing individuals to invest at least a part of their payroll taxes in personal accounts, he left the possibility open.

Gore supported all three of these ideas, as well as leaving open the possibility of personal investment in the stock market. And, according to his financial disclosure reports, Gore owns between $250,000 and $500,000 in stocks through his federal pension plan, which allows federal government employees to direct the investment of their retirement funds in the stock market. Yet today as a presidential candidate, he opposes Bush’s modest idea of allowing all workers to invest between 15 percent and 20 percent of their combined employer-employee payroll tax contributions in stock and bond markets.

To see how this might work, we have only to look at the growing number of countries around the world that have moved away from pay-as-you-go retirement programs and now rely at least in part on allowing workers to invest for their retirement in stocks and bonds: Chile, Argentina, Bolivia, Colombia, El Salvador, Mexico, Peru, Uruguay, Poland, Australia, Great Britain, Denmark, Italy, Switzerland and Finland. In Chile, since the privatized system became fully operable in 1981, the average rate of return on investment has been 14 percent per year.

More evidence comes from right here at home, where some people are fortunate enough to escape the Social Security trap. More than a million state and local government workers in the United States are currently exempt from paying Social Security taxes and participate instead in private pension plans, mostly defined-benefit plans that guarantee workers a specific retirement benefit. They include state employees in Colorado, Maine, Nevada and Ohio. Teachers in California (the famous TIAA-CREF plan) and Ohio, city employees in San Diego and Los Angeles, and firefighters in Houston also are exempt from Social Security taxes because they participate in a private pension plan.

Another compelling natural experiment in private retirement saving comes out of Texas, where in the early 1980s three county governments allowed their workers to exercise an option available to them at that time to withdraw from Social Security and invest in a private retirement savings plan as well as purchase private disability policies.

According to research conducted by the Heritage Foundation, even with conservative defined-benefit programs, these government workers can receive anywhere from 3.3 percent to 7.5 percent more in retirement income than Social Security can provide to workers with equal earning histories.

With self-directed personal accounts like those under consideration by Bush, the rate of return can be expected to be even higher. Over the past century, for example, a conservative portfolio of 50 percent U.S. Treasury bonds and 50 percent stock index funds has yielded a 6-percent rate of return, almost five times that which young workers can expect from Social Security.

Scare tactics have always been liberal politicians’ stock-in-trade where Social Security is concerned. Evidently Gore intends to perpetuate that unseemly tradition with his own elitist twist. He believes that investing in the stock market is good for the federal government and for federal employees like him, but it’s too risky for “peons” like you and me. I call that “stock market snobbery.”