For many Americans, paying into Social Security is like dropping dollar bills down a well - a well with no bottom and no bucket. And each of us is dropping thousands of them every year.
Social Security as it's now operating will begin spending more than it collects in 2013 and will be broke in 2030. That means a 40-year-old today could possibly receive up to seven to 10 years of benefits after paying into the system for 40 to 45 years. Not a good return on your investment by anyone's standards.In an encouraging show of bipartisan foresight, two senators, a Democrat and a Republican, have come up with a plan to use the free market system to our advantage to help save Social Security and provide better retirement security for millions.
It partially echoes on a small scale a formula espoused by Sam Beard, chairman of the National Development Council and a former staff associate to the late Sen. Robert Kennedy, who explains in a forthcoming book how Americans can provide for their retirements by using "the magic of compound interest."
In the proposal written by Sens. Alan Simpson, R-Wyo., and Bob Ker-rey, D-Neb., compound interest would also come into play as workers invested about one-sixth of their current Social Security taxes in a personal investment plan, similar to an Individual Retirement Account.
Economists who support the plan say private savings plans "could easily deliver several times more retirement income for future workers than the projected benefits payable by even a patched-up Social Security system."
The senators' plan would allow workers to divert only 2 percent of the current 6.2 percent on salaries up to $61,200 now collected by Social Security. That's a good start but should be built upon later.
Using the "magic of compound interest" and investing in a private fund at 7 percent return rate, a dollar saved at age 20 would be worth $16 at age 60. Adding to the fund throughout a working career would mean a sizable nest egg that would help provide a comfortable retirement.
Private investment accounts would also boost capital formation, wages and employment.
Considering that those whose careers will outlast the currently-projected viability of Social Security are also notoriously poor savers, a bold idea such as this one makes sense.
Future fine-tuning of the program may address criticism that workers might not invest wisely, that funds may not be available for those who are disabled and for survivors of those who die early before investments have time to mature.
Beard recommends the Social Security system set up a corporation to certify and approve private-sector money managers. Workers would choose an investment manager from a list and could switch among listed managers at any time.
A similar system is working well in Chile. Now let's try it in the United States.