Younger workers should look at the current Social Security system with the most skepticism. It's a behemoth federal program that rewards the politically active (older people) at the expense of the apathetic (younger people). It employs user-friendly terms like "contribution" and "trust fund" when it’s really little more than a tax on laborers.
Social Security will begin running a net annual deficit in fifteen years, leaving policymakers with no choice but to raise payroll taxes to keep the checks rolling. At best, young workers today can expect a 2 percent return on their "contribution." But it’s more likely they’ll see a negative return, or that the entire system will go belly-up before anyone under 30 sees a dime.
So what can be done?
Americans need to be given ownership of our Social Security "accounts." We should be able to invest and save for our retirement as we please. Short of burying the money in a mason jar, or buying a thousand shares of Pets.com, almost any investment will yield higher returns than the 2 percent young workers can expect from Social Security today.
Currently, 6.2 percent of each paycheck goes to Social Security, and employers match with another 6.2 percent. Saving 2.4 percent of that money to provide for disability payments and payments to survivors, an ideal system would leave Americans free to invest 10 percent of each paycheck into a mix of stocks and bonds.
Under even a conservative estimate, the returns would be manifestly more lucrative.
For example, let’s say you’re a 25 year-old female. You’ve been working full-time since 1998, and you currently make $45,000 per year. Under the current system, if Social Security remains solvent, you could expect to get about $1,950 per month when you retire.
Let’s say now that you are free to invest under a 10% plan. You invest in an even mix of stocks and bonds, with a modest return of 3% on bonds, and 5% on stocks.
Even with these low-ball projections, your monthly retirement income would jump from $1,950, to $3,215. What’s more, you’d have $466,000 in your retirement fund to do with as you please. You could bequeath it to family in your will. You could take a trip to the Seychelles. You could get front-row seats for the Stones, who undoubtedly will still be touring. Under the current system, you’d get $1,950 per month. But no money to leave to the grandkids. No Seychelles. No Rolling Stones.
Privatization would also benefit the poor. It would enable retirees to bequeath the wealth they’ve made by working and investing, thereby helping younger generations escape the cycle of poverty. And since only the first $85,000 of income is subject to Social Security taxes, a privatization program would disproportionately benefit the lower and middle classes. In short, private accounts would go along way toward addressing the growing gap between rich and poor.
Privatization would also benefit African-Americans, who have a lower life expectancy than the general population. Thirty-seven percent of black men fail to reach age 65. Under a private system, if a man should die before retirement, the Social Security he’s paid all of his life — and the yield it’s been collecting — could be passed on to his family. It wouldn’t be returned to the general fund, as it is today.
Women too would prosper. A recent Harvard study looked at 1,992 women who retired in 1981. Every woman in the study would have benefited from a private system similar to the one outlined above. Not one woman would have been worse off. On average, single women would have received 58 percent more than the current system allows, married women over 200 percent more.
Private accounts would benefit everyone, but the young, the poor and women, especially. So how can we bring this about? How can twenty and thirty-somethings roll back sixty years of Social Security bureaucracy?
Step one is to get interested. Step two is to get educated.
Take notice of what’s taken from each paycheck. Digest it. Allow yourself to get a little agitated by it. Consider for a moment how that money might multiply if you could invest it in a 401K, or in non-government bonds. Washington D.C.’s Cato Institute (for whom I work) has an online calculator (http://calculator.socialsecurity.org/) that will crunch the numbers for you.
Talk up Social Security to friends and neighbors. The system is by design an intimidating labyrinth of numbers and percentages and bureau-speak. Consequently, the only people who take the time to learn the issue are those with a pressing interest — retirees and those soon to be retired. Private accounts don’t interest them much. They’re ready to get paid. Younger people have more to gain. But we need to get informed.
The options present a stark contrast in outcomes: a public system that may not survive another thirty years — and will offer only minimal benefits if it does — or a private system that is destined to build wealth, contribute to the economy, and allow for assets to be passed on to future generations.
It’s time to get interested.
Radley Balko is managing editor of www.cato.org, and a marketing manager at the Cato Institute.