April 28, 2000

The Best Way to "Save Social Security"

by Michael Tanner


Michael Tanner is the director of health and welfare studies at the Cato Institute.


Vice President Al Gore wants to "save Social Security the right way." Texas Gov. George W. Bush says that his plan will "save Social Security for future generations." Their proposals are very different, but neither candidate misses an opportunity to stress his commitment to the nation's largest government program. But before either of these would-be saviors gets too carried away, perhaps it is worth asking whether Social Security should be "saved."

There is no doubt that the program is in need of saving. Within 15 years the program will begin to run a deficit, and, overall, it is more than $20 trillion in debt. But Social Security's real problems go far beyond its looming financial collapse and cannot be solved simply by finding enough money to keep the program out of bankruptcy for a few more years. Instead of trying to save a particular government program, Gov. Bush and Vice President Gore should focus on providing a better and more secure retirement for America's workers.

Social Security is supposed to function on two levels: as a retirement program and as an anti-poverty program. Unfortunately, our current Social Security system fails miserably in both roles.

Defenders of Social Security often cite its role in reducing poverty among the elderly. But, despite receiving Social Security benefits, nearly one out of eight seniors still lives in poverty. In fact, the poverty rate among seniors remains slightly higher than that for the adult population as a whole. Among some subgroups the problem is far worse. For example, although the poverty rate for elderly married women is relatively low (6.4 percent), the poverty rate among elderly women who are widowed (21.5 percent), never married (21.1 percent), or divorced or separated (29.1 percent) is far higher. African-American seniors are also disproportionately left in poverty, with nearly 30 percent collecting incomes below the poverty level.

Social Security's failure as an anti-poverty program is not surprising, since Social Security benefits are actually quite low. A worker earning minimum wage over his entire life would receive only $6,301 per year in Social Security benefits, well below the poverty level of $7,507. As mentioned above, poor seniors receive nearly 80 percent of their retirement income from Social Security, and many receive no other income at all. For those seniors, Social Security is insufficient to raise them out of poverty.

Of course, supporters of Social Security often point out that without the program as many as half of American seniors would be poor. But that line of reasoning is just plain silly. Obviously, people would be a lot poorer than they are today if you simply took away their Social Security checks. No one is proposing that.

But what if seniors were allowed to invest their payroll taxes for themselves instead of paying them into the Social Security system? If the minimum-wage worker described above had been able to invest his payroll taxes, he would be receiving retirement benefits of $20,728 per year, nearly three times the poverty level. Clearly, therefore, by forcing workers to invest in the current pay-as-you-go system, rather than in real capital assets, Social Security is actually contributing to poverty among the elderly.

Moreover, because workers do not actually own their Social Security benefits, those benefits are not inheritable. Workers cannot accumulate real wealth and pass it on to their heirs. Thus, Social Security not only contributes to poverty among current retirees, it helps perpetuate it among future generations.

Social Security's record as a retirement program is equally dismal. According to the Social Security Administration itself, workers born after 1973 will receive rates of return on their taxes ranging from 3.7 percent for a low-wage, single-income couple to just 0.4 percent for a high-wage-earning single male. By comparison, the average rate of return on the stock market since 1926 has been 7.7 percent.

Because it deprives American workers of the ability to invest in private capital markets, the current Social Security system is costing individual American retirees hundreds of thousands of dollars. A single-earner couple whose wage earner is 30 years old in 2000 and earning $24,000 per year can expect to pay more than $134,000 in lifetime Social Security taxes and receive $292,320 in lifetime Social Security benefits (including spousal benefits), assuming that both husband and wife live to normally expected ages. However, had they been able to invest privately, they would have received $875,280. That means the current system is literally almost stealing more than half a million dollars from them.

If all that is not enough, our Social Security system contains numerous inequities that unfairly penalize working women, the poor, African-Americans and others.

This is the system that politicians are fighting so hard to save. But there is an alternative: A new Social Security system based on individually owned, privately invested accounts will do far more to fight poverty and provide a better and more secure retirement. Think about that the next time a politician promises to "save" Social Security.

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