January 04, 2005
Tuesday

"We have tried to frame a law which will give some measure of protection to the average citizen and his family against ... poverty-ridden old age," said Franklin Roosevelt as he signed the Social Security Act on Aug. 14, 1935.

Those are noble, heartfelt sentiments for a difficult period, but as 2005 begins, it's time to face facts. Social Security stinks. Government may owe a measure of protection to retirees, but this is a terrible way to provide it.

Social Security is an absurd anachronism - and most people under 50 know it and want something better. By its 70th anniversary, the system must get the restructuring it desperately needs.

Begin with the obvious. Social Security is a Ponzi scheme headed for collapse. It is a pay-as-you-go program. Taxes from working Americans go directly into the pockets of retired Americans. (There's a tiny bit left over for a so-called "trust fund," which will soon be depleted.) Initial retirees scored big, as early winners who are bait for any Ponzi. The very first recipient, Ida May Fuller, paid in $44 and collected benefits of $20,934.

Times were different. In the 1930s, there were 11 workers per retiree; today, the ratio is 3-1; in about 20 years, it will be an untenable 2-1.

The life expectancy of a newborn in 1929 was 57; today, it's nearly 80. Americans are now far more likely to live long enough to get benefits, and they'll be paid those benefits much longer, starting at age 62. Meanwhile, the growth of the work force is slowing, and benefits are rising because of a generous formula.

The traditional remedy to this imbalance is to increase taxes on workers or cut the benefits of retirees, or both. But we've come to a point where such an approach will inspire both workers and retirees to throw up their hands and say, "Enough of this nonsense."

Instead, the obvious long-term solution is for Americans to fund a larger part of their own retirements - just as they pay for their own food and clothes and shelter. That way, they won't have to worry whether there are enough workers to pay their bills when they retire. They'll pay their own bills out of their savings.

You would think, from the bleatings of interest groups, that self-funded retirements are loony and radical. An upcoming newspaper ad from the AARP will show a couple saying, "If we feel like gambling, we'll play the slots."

But saving for retirement is no more gambling than buying a home - which is something that 68 percent of Americans do very well. Going deeply into debt to purchase real estate is a far bigger risk than building a retirement account between your 20s and 60s.

Currently, 42 million U.S. workers own a 401(k) plan and manage it pretty well. The average annual return for the 10 years ending in 2002 was 6.4 percent, compared with 6.8 percent for professionally managed pension plans, according to Watson Wyatt Worldwide.

After inflation, the average return on a 401(k) was about 4 percent. A study by the Social Security Administration projects, with generous assumptions, that middle-income workers born in the past 30 years can expect returns of just 1.5 percent to 2 percent from Social Security. A study by the National Center for Policy Analysis found that for a single black man entering the work force today, it will be 0.9 percent.

That's a crime. Since 1926, the average annual return for a conservative portfolio split 50-50 between Treasury bonds and a stock-market index has been 8 percent; after inflation, 5 percent. A reasonable approach to restructuring Social Security would guarantee current benefits for retirees and let other Americans take half of what now goes to payroll taxes and put it into a 401(k)-style personal retirement account, retaining a thinner pay-as-you-go layer - which, as the program showed its success, would eventually be phased out.

What's the role of government here? To make contributions to such accounts mandatory, keep choices sound and sensible, and postpone withdrawals - so the rest of us don't have to rescue the profligate and the unlucky from what FDR called "poverty-ridden old age."

Americans deserve to own their own retirement accounts, which they can use as seniors and later pass on to their kids, church or charity. It's patronizing - and, with the current condition of Social Security, dangerous - to pretend otherwise.

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