Our Social Security System is truly a pay-as-you-go system, as the assets in the so-called Social Security Trust Fund cover only a tiny percent of existing obligations. As the number of retirees rises relative to the number of workers as our population grows older, it will be impossible to pay existing benefit levels with the current level of Social Security taxes in another generation or so. Young people recognize this: surveys show that most do not expect to receive significant return on their Social Security tax payments when they reach retirement age.
A partial solution to the problem would come from investing Social Security assets in securities other than U.S. government bonds. For a period of several decades, the average rate or return on common stocks has been about 10 percent a year, far greater than that on bonds. To be sure, the return on stocks is volatile, exceeding 20 percent in some recent years, but in other years being negative. Yet pension investments are for the long term, not immediate capital gains. Over long periods of time, stocks consistently outperform bonds, real estate, precious metals, or other investment vehicles.
About three-quarters of working Americans already have some sort of non-Social Security pension plan. From 1980 to 1996, assets in those plans rose approximately sevenfold, to about 6 trillion dollars. A majority of those assets are in stocks, mutual funds and related equity investments. Like millions of state and local government employees, I am in an actuarially sound pension system that invests heavily in stocks and non-government bonds, and I will earn a pension far better than what Social Security offers. Why not let all workers invest as we allow state and local government workers not covered by Social Security to do?
Opponents of this idea claim that investing in stocks is risky. Yet the evidence accumulated over the decades is clear that a diversified portfolio of stocks far outperforms U.S. government bonds as an investment. Other opponents raise the possibility that if the Social Security Administration started investing in common stocks, this would be the equivalent of a partial government nationalization of industry creeping socialism.
To deal with the last problem, why not empower individual recipients themselves to invest their mandatory retirement savings? Why not create IRA-like accounts for Social Security beneficiaries, with the actual investing of funds being done by competing private investment firms? Each individual would decide whether, say, Charles Schwab, Paine Webber, the Social Security Administration, Bank of America or a plethora of other institutions would be entrusted with his or her money. Competition would reward the successful financial firms and punish the bad ones. Indeed, why not allow individuals who feel qualified to invest the funds themselves?
The assumption underlying the existing Social Security program is that the federal government is a prudent investor while individuals in general are irresponsible ones. (That why they are not allowed to manage their own Social Security contributions.) The evidence is rather the opposite. Politicians pursuing short-term electoral goals have created a Ponzi scheme built on a financial house of cards, with meager assets invested in low-return bonds. By taxing young workers heavily to provide generous benefits to the elderly, for two generations our political leaders have conned voters into thinking that their financial security is being enhanced. Now, of course, the public is waking up as the house of cards starts to crumble.
By contrast, individuals have poured literally trillions of dollars in a responsible fashion into a plethora of 401K plans, company pension schemes, IRAs, mutual funds and so forth. In 1996, assets of private pension plans alone were more than 12 times those accumulated by the governments Social Security system. The poverty rate among Americans over 65 is now lower than for younger Americans, in large part because of the responsible financial acumen of our senior citizens when they were younger (and, in part, because of higher Social Security benefits that are not sustainable in the long run under the current system). More than 58 percent of the income earned by our senior citizens already is in non-Social Security form. It is time for the government to free individuals from the strictures of a Depression-era Social Security system that is morally and financially teetering on the edge of bankruptcy.