If you’re reading this column, you’re probably an investor in the stock market. That makes you a member of the approximately 60% of American households that own stocks, either directly or indirectly. That also makes you part of what President Bush likes to call the “ownership society.”
But what about the other 40% of households that don’t own stocks? How can we talk about an “ownership society” — or for that matter, how can we talk about equal opportunity — when almost half of our families are excluded from owning a stake in American enterprise?
These fundamental questions of fairness and opportunity are motivating the movement to transform the Social Security system into a program of private investment accounts, in which every working American can choose to invest in the stock market. Last year, President Bush told me that private accounts for Social Security would be his single highest economic priority in his second term. Based on the amount of political buzz it has gotten since the election, I really think it’s going to happen.
Yes, it seems “radical” to think about tinkering with Social Security. Plenty of people depend on it, and it’s the largest single program of the federal government. But remember, once upon a time it was even more “radical” to think about instituting Social Security in the first place.
Most people don’t realize this, but the idea of Social Security in the United States began in the early 20th century as part of a resurgence of evangelical Christianity. The Social Gospel movement believed that sin was the product of poverty in the new industrial era. Its leaders, such as Walter Rauschenbusch, preached that it was the duty of the government to pave the way for “God’s kingdom on Earth” by reining in the power of industry and redistributing wealth to all.
Most of the aims of the Social Gospel movement have been achieved through the secular state. Today we have everything the Social Gospelers advocated — Social Security, an income tax and government regulation of industry. I don’t know about the status of sin, but we’ve come pretty close to eradicating poverty. Consider this: we define “poverty” so lavishly today that, in 1900, 90% of Americans lived below what we now call “the poverty line.”
So now, 100 years after the Social Gospel movement, it’s time to be “radical” again. And it’s no surprise to see evangelical Christians leading the charge in “radical” ideas, just as they did 100 years ago. But now, instead of thinking of Social Security as a way to eradicate poverty, it’s time to think of it as a way to distribute economic growth and opportunity more equally.
Today’s Social Security system is, in many ways, manifestly unfair to the Americans most in need of opportunity. For one thing, by imposing a 12% tax on payrolls — half paid directly by workers, and half paid indirectly by employers — Social Security soaks up any capacity to save that lower-earning workers might have. If you’re earning minimum wage, and more than 6% of your take-home pay gets sucked up by Social Security taxes, how much do you have left over to invest in the stock market — or even a bank account? The answer is: none.
Another problem is that Social Security is structured to provide the lowest benefits to the very people who probably need those benefits the most. Census data show that, on average, poor people live shorter lives than rich people, and that African-Americans have shorter lives than whites. Since you get Social Security benefits for as long as you live, that means that the poor and African-Americans effectively get fewer benefits, on average.
And perhaps most fundamentally, Social Security is unfair because it makes America’s poorest citizens dependent on the whim of Congress for their retirement incomes. You don’t have any property rights in your Social Security benefits — you don’t “own” them. So if some future Congress decides to cut your benefits, there’s nothing you can do about that. Can’t happen, you say? Think again — it already has. Congress has already voted to raise the retirement age at which you can start receiving benefits.
A system of private accounts would change all that. Think of what it could mean if you could divert some or all of your payroll taxes into a personal account that you own and control. You would own your account, and no one could take it away from you. It would be yours as long as you live, and when you die you could bequeath it to your family. You could decide how to invest it — including the stock market, where you could get some real long-term growth potential.
For most of the readers of this column, much of this doesn’t matter. You’re already invested in the stock market. You already control your own destiny. But think of people less well-off than you. For them, Social Security private accounts would be the only way they can get a seat at the table of American opportunity.
I know all the objections — there are plenty of them. But they can all easily be refuted.
Some people worry that diverting money from today’s system into private accounts would damage the system’s solvency. Not true. The system is already in trouble, with future liabilities that outweigh assets and scheduled revenues by trillions of dollars. Without raising taxes or cutting benefits, the best hope is to get people to remove themselves as future liabilities of the system by choosing private accounts instead. The more people who have private accounts, the stronger the system becomes.
And some people worry that inexperienced investors would throw away their retirement security by making poor stock market investments (like betting it all on Enron). Well, with opportunity comes risk. But at the same time, it’s simple enough to put boundaries on how people could invest their private accounts. The government could establish maximum levels to be invested in stocks, and require that stock investments be in the form of massively diversified and low-cost index funds.
It all sounds incredible. We’ve lived with Social Security as it is for so long, it’s hard to imagine it changing so fundamentally. But mark my words, it’s going to happen. And when it does, America will be a better place.
And by the way, in case this hasn’t occurred to you, the stock market would suddenly become a pretty exciting place, too. Now that’s a “radical” thought.
The above is an “Ahead of the Curve” column published December 10, 2004 on SmartMoney.com, where Luskin is a Contributing Editor.