An All-Investor Nation
Time to transform Social Security into a wealth-creating vehicle.
By Larry Kudlow
Imagine if every worker in the United States had the opportunity to become an investor. Well, that dream has a shot at reality.
In his 2004 State of the Union address President Bush suggested that workers be given the ability to redirect a portion of their payroll taxes into individual retirement accounts. That was a big statement. It means there’s now a legitimate chance of transforming Social Security from a financially bankrupt system into a source of real ownership and prosperity for all Americans.
Many Americans are investors, but not all. According to the Federal Reserve, 31.6 percent of households owned stock either directly or indirectly in 1989. By 2001 that number was 51.9 percent.
Since the Reagan presidency the country has made great strides toward democratizing capitalism by reducing marginal tax rates, deregulating the financial-services industry, and creating savings vehicles like IRAs and 401(k)s. Bush’s latest proposal to create Lifetime Savings Accounts is another step in this right direction.
That said, the greatest impediment to saving, investing, creating wealth, and retiring prosperously is still the payroll tax — which is presently 12.4 percent. Each payday workers see half of that go to today’s retirees as well as many government programs. This depletes household savings and diminishes wealth, leaving too many Americans dependant on the government for retirement income.
When discussing even the idea of personal retirement accounts skeptics always point to the volatility of the stock market. What they fail to realize is that Social Security is a riskier scheme than the market will ever be. The government can at any time raise taxes or cut benefits. Moreover, workers born after 1960 are expected to receive a real rate of return on their payroll-tax contributions of less than 2 percent. Alan Greenspan stated this in 1999; his estimate was likely generous.
This measly rate of return (which is actually negative for African-Americans, a group with high mortality rates) is not a fair deal for retirees — today or in the future. Even workers who put their money in standard government-insured savings accounts will earn higher rates of return than what the current Social Security system can provide.
But there’s an alternative. According to a study by the chief actuary of the Social Security Administration, a worker with a large personal retirement account can expect a return that’s 60 percent greater than what’s promised under the current system. As a Cato Institute study has shown, even during the worst twenty-year period for stocks, 1929 to 1948, the market’s average rate of return was 3.36 percent — a better return than Social Security promises today.
Dissenters also point to the collapse of Enron as further evidence the stock market is a “risky scheme.” To the contrary, the Dow Jones closed at 9,736 the day after Enron’s bankruptcy was announced in December 2001. Today it hovers above 10,400. Investors, who account for two out of three of all voters, have demonstrated by perseverance amid short-term shocks that they know the market is an immense source of long-run wealth. The investor class can vouch for the common sense of personal retirement accounts.
It’s interesting that many who adamantly oppose personal retirement accounts already have their personal pensions in the stock market. In fact, state and local governments have been investing pension money in private stocks and bonds for generations. Members of Congress and other federal workers also have the option to invest in private markets. Why can’t ordinary people have this opportunity?
The truth is they should. Individual retirement accounts are not a risk, but an historic opportunity to increase prosperity for all.
The question remains “How?” — but the Alliance for Retirement Prosperity has an excellent answer. This group — led by former congressman and HUD Secretary Jack Kemp, former House Majority Leader Dick Armey, and former Social Security Commissioner Dorcas Hardy — is devoted to enacting legislation that will enable all Americans to invest at least half of their payroll taxes in personal retirement accounts.
Under their scheme, the government, in effect, becomes the plan sponsor, putting the appropriate funds on the table and guaranteeing something akin to a death benefit should individuals lose money over forty years. In the unlikely event that market performance falls below promised Social Security benefits, government fills in the difference. In the likelier scenario that investment-market performance exceeds Social Security returns, investors pocket the gain.
This plan — vacant of draconian tax increases or benefit cuts — is on the money. Today there’s a small window of opportunity for transforming Social Security into a vehicle that creates wealth and retirement prosperity for individuals, households, and communities. All Americans can have the chance to realize the American Dream if every American becomes an investor and every worker an owner.
— Larry Kudlow, NRO's Economics Editor, is CEO of Kudlow & Co. and host with Jim Cramer of CNBC's Kudlow & Cramer.