Generally speaking, the danger inherent with a strong economy is that people will become so confident they turn reckless, investing as if the market never again will turn sour. When it comes to Social Security reform, however, the opposite seems to be true. People (politicians, mainly) worry that a plan allowing people to invest their social security funds in the stock market would lead to disasters. The good times, they sagely remind everyone, won't last forever.
In this one instance, the cautious approach is dead wrong. It distorts history. The fact is, even in the worst of times the market has, over the long run, paid dividends that absolutely dwarf the returns people currently get on their Social Security taxes.People may not have thought much about this. We hope that changes soon.
George W. Bush has promised to make Social Security reform -- specifically, the ability to invest the funds privately -- a central part of his campaign for the White House. He is expected to touch off a contentious debate. Al Gore is staunchly opposed, believing such a plan too risky.
The question every American ought to be asking is why the issue hasn't been more strongly debated before now. Social Security's dire condition is not a matter of opinion. Experts agree the system, as now constituted, will begin running a deficit in about 2015. By 2037, if nothing changes, it will have the ability to pay beneficiaries only 75 percent of their promised benefits. If conventional wisdom says politicians commit suicide by messing around with Social Security benefits, what does it say about politicians who allow the system to collapse on itself?
By any objective measure, a system that would allow private investments controlled by the contributors would be far better for everyone involved than is the current system. That has been the experience of other nations who already have blazed this trail. It is the opinion of scholars who have studied rates of return. Two years ago, the Washington-based Heritage Foundation released a report that studied and compared the current system with private investments. Among other things, it found that an upper middle income married couple, born in 1950 and with two children, would receive about $682,372 in benefits under the current system. By contrast, they would receive $2,394,370 if they had been allowed to invest part of that money in a broad market equity fund. In the stock market, hard times comes and go, but the long-term prognosis has been rosy from the beginning.
The contrast becomes even more stark when low-income minorities are examined. For these people, the current high rate of payroll taxes for Social Security often inhibits their ability to save money on their own. They are left in the end with a meager monthly check from the government and little personal savings. For them, private investments could mean the difference between a comfortable life and never-ending hardship.
Naturally, a system allowing personal investments would have to be structured so that government is not tempted to protect investors by involving itself unduly in market affairs. To do this, contributors themselves would have to be granted significant freedom. That shouldn't be too risky, considering about half of all Americans current own stock.
Also, the system would have to continue providing basic benefits to those who suffer catastrophic problems and have not yet had time to contribute much. But these are details that easily could be worked out, if only Congress and the next president can muster the will to work on them. At least now, these ideas will get some air time amid the usual election babble.