Building a Nest Egg

Nearly 18 months after Rep. John Edward Porter (R–Ill.) asked the General Accounting Office to estimate the effects of partially privatizing the Social Security system, the GAO's report is out. (See Trends, Dec. 1989.) If Congress pays attention to the GAO's findings, the prospects for future retirees could improve dramatically.

Social Security currently collects billions more in payroll taxes than it pays out in benefits. This surplus is supposed to be reinvested in government securities that will pay benefits for future retirees; in truth, the surplus merely masks the overall federal deficit. The GAO study estimated the return on investment individual taxpayers would receive if they invested their surplus taxes in private, interest-bearing accounts (Individual Social Security Retirement Accounts).

Allowing for estimated cost-of-living increases, the GAO worked out how much money would accumulate in an ISSRA with a long-term real return comparable to government securities (1 percent), to corporate bonds (1.6 percent), or to stocks that match the Standard & Poor 500 index (5.5 percent). The GAO estimated that the average S&P investor would accumulate 24 percent more at retirement than someone who stuck with Social Security alone; the other investments would about match Social Security.

Of course, individual investments or Social Security might do worse than expected. Indeed, Peter Ferrara of the Cato Institute has reported that Social Security's true return on investment for younger taxpayers can actually lag behind the inflation rate.

Robert Gustafson, Porter's legislative director, says ISSRAs would have a built-in advantage over Social Security: At retirement, accumulated ISSRA funds would belong to the retiree—and not be swallowed up in a bogus trust fund that's later paid out to somebody else. Millions of low- and moderate-income Americans would have a retiement nest egg—or a substantial death benefit for their survivors, whether or not they live past retirement.

Gustafson says that Porter will introduce at least one bill to establish a program like the one in the GAO study. Porter's bill would end the Social Security surplus, allowing individual taxpayers to invest excess payroll taxes in the ISSRAs of their choice.

While Gustafson says he doesn't know if an ISSRA plan can win congressional support, a February 1990 poll by Market Opinion Research shows 68 percent of adults support the concept. The proposal's strongest supporters are young people: 87 percent of 18- to 25-year-olds and 78 percent of 25- to 39-year-olds favor the plan.

Porter's program would not return excess payroll taxes to individuals. It is a forced savings plan. But it would allow Americans who retire in the 21st century to have a lot more control over the money they've earned.