'Capitalize' Social Security to create a nation of shareholders

March 11, 1996|By Sam Beard

NEW CASTLE, Del. -- Baby Boomers are turning 50 at the rate of 10,000 a day. As they retire, 15 years from now, we'll go from 40 million seniors on Social Security to more than 80 million by 2030. But the work force paying the benefits is not growing proportionately.

In 1945, 20 workers supported one beneficiary. Today, 3.1 workers support one. By 2030, less than 2 workers will be available to support one retiree, and they will be asked to accept a 60 to 70 percent lifetime tax rate. This is not possible.

The looming crisis in Social Security is sobering and scary to the millions of Americans who have no savings and rely on the program for retirement income. Almost half of all seniors depend on the program for more than 75 percent of their income. In the past 30 years, thanks to Social Security, 20 percent of America's seniors have been lifted out of poverty.

Social Security is a sacred contract between government and the American people, and it must be preserved. As a nation, we have three choices.

We could try to maintain the existing public, pay-as-you-go system. According to the Social Security Trustees report that would require either raising payroll taxes almost 50 percent, 12.4 to 18 percent, or cutting benefits 30 percent. A middle ground, proposed by the American Association of Retired Persons, is a ''trade-off'' involving a 20 percent payroll-tax hike combined with a 13 percent reduction of benefits. We must be able to do better.

A second option is to ''privatize'' Social Security. That implies ending the federal promise of a decent retirement income for all Americans, closing the federal agency and asking millions of Americans to manage their private investments or spend their ''golden'' years in poverty. This is not acceptable in America.

A third option

The third option is to ''capitalize'' Social Security. Create a nation of savers and shareholders with control of their own money in IRA-type accounts under the Social Security umbrella. This option preserves the Roosevelt contract, while updating the system to accommodate both elderly and young workers. And it offers a substantial bonus: the opportunity to accumulate capital for ourselves and our heirs.

The plan reinforces Social Security, but changes it from a pay-as-you-go to a funded system. Two tiers would exist within Social Security. In the second tier, individuals would be allowed to set aside portions of their Social Security payments into their own, named accounts. The sums would be invested in the private sector and would grow during their working lifetimes. 2/3 2/3 TC At retirement, workers would choose -- to live off 5 percent income from the capital, and pass the capital on tax-free to heirs, or to purchase an annuity, which would provide more money during the retiree's lifetime, but not leave an inheritance to pass on.

The Tier I payroll-tax system would remain to provide a safety-net guarantee of a decent retirement income for all Americans. It would protect the 20 percent of current Social Security recipients who are not workers -- non-working spouses, widows, dependent children and the disabled -- and offer workers an insurance policy against poor investment returns or a recession.

The change to a funded system would give Americans the opportunity to build a substantial capital nest egg during their lifetimes. The goal would be for each American to set aside a minimum of $1,000 per year. Even a high school dropout with a minimum-wage job, by paying about $6 a week -- an hour-and-a-half's pay -- into Social Security, would see his nest egg grow from $1,240 the first year to $5,000, to $20,000 and over a lifetime to $100,000. Hard work will have paid off.

The more than 61 million American home owners take special care of their homes and neighborhoods. Under a funded Social Security system, America would become a nation of owners and savers, with more than 100 million participants -- all with a stake in strengthening the national economy.

The 10,000 Boomers turning 50 every day push us to a choice -- generational warfare under the current system, if young Americans refuse to pay the crushing taxes needed to fund the Baby Boomers' retirements, or a capitalized Social Security system that would preserve the economic benefits for seniors at the same time it provides economic opportunities for the young.

Sam Beard is chairman of Equal Capital Opportunity Now, a project of the National Development Council.

Pub Date: 3/11/96

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