Real Savings


When you're married to a rabbi, you learn all sorts of interesting facts, many of which have nothing to do with Judaism. Wending my way through TurboTax this year, I discovered that members of the clergy can request an exemption from Social Security taxes. "What a scam!" my mother-in-law said when I described this loophole.

In truth, however, Social Security is the real scam. Sold as a pension program under which each worker's contributions would be saved in a "trust fund" and dispensed, with interest, when he retired, it is actually a pay-as-you-go transfer program in which current workers fund the benefits of current retirees.

Even when (as now) revenues exceed benefits, the surplus is not invested in anything except government bonds, which are simply promises to repay the money out of future taxes. Not surprisingly, the annual rate of return from this system is pitiful: According to the Social Security Administration, it will average about 3 percent for workers born in 1940, 2 percent for workers born in 1960, and less than 1 percent for workers born now.

Those estimates assume that the system can continue to deliver promised benefits without an increase in payroll taxes. Taking into account the shortfall expected with the imminent retirement of the baby boomers, the rates of return will be even lower–in many cases, negative.

By contrast, as the Cato Institute's Michael Tanner notes in a new paper, "the average rate of return to the stock market since 1926 has been 7.7 percent….Even corporate bonds have consistently outperformed Social Security," with an average return of more than 4 percent.

Given the lousy deal offered by Social Security, the outrageous thing is not that members of the clergy have an out but that the rest of us don't. Allowed the choice, who would want to keep getting ripped off when he could invest for his own retirement and come out way ahead?

Yet George W. Bush's timid proposal to let workers put a small share of their payroll taxes into private investment accounts has been attacked as reckless and divisive. Writing in The New York Times, Princeton economist Alan S. Blinder, an adviser to Al Gore's campaign, accuses Bush of threatening to cut "one of those precious ties that bind our society together."

What Blinder means is that Social Security forces "us high-income people" to subsidize "less fortunate citizens," uniting the two groups as victims and beneficiaries of government expropriation. Without that subsidy, he fears, the poor will not be able to manage.

This is not just because they are poor but also because they are stupid. Blinder pities the "less fortunate citizens" who "may not know the difference between a stock and a bond."

"Is freedom of choice such a blessing for them?" he asks. "Will they understand the risks to which they may be exposed?"

The short answer is that having your own money at stake is a powerful incentive to learn the difference between a stock and a bond (or to consult those who do). More to the point, Blinder's implication that only the affluent would benefit from Social Security privatization is simply not true.

In his Cato paper, Tanner estimates that a worker born in 1935 who never earned more than the minimum wage would be receiving retirement benefits of $20,728 a year if he had been allowed to invest his payroll taxes, compared to $6,301 a year from Social Security. "A single-earner couple whose wage earner is 30 years old in 2000 and earning $24,000 per year," he writes, could expect to receive benefits totaling $875,280 from private investment, compared to $292,320 from Social Security.

Concerning stock market volatility, which Blinder cites as a reason to worry about how "less fortunate citizens" would fare with a private retirement system, Tanner notes that "there has been no 20-year period since 1926…in which the market performed worse than projected future returns from Social Security." And since tax revenues, like investments, depend on economic growth, "private capital markets will always outperform Social Security," whatever the economy's ups and downs.

At bottom, then, Blinder's objection to any privatization of Social Security (and, presumably, Gore's) hinges on the assumption that "less fortunate citizens" will be so careless with their own money that even the government could do a better job. Hence "freedom of choice" should be limited to people who already have investment portfolios.