The National Summit on Retirement Savings begins today in Washington, DC. President Clinton, House Speaker Newt Gingrich, and Senate Majority Leader Trent Lott have appointed over 200 delegates from across the country who will gather together to discuss the problem of saving sufficiently for retirement.
The organizers have identified a real problem. For most workers, Social Security benefits will be substantially less than half of pre-retirement income. Less than half of private sector workers participate in employer sponsored pension programs. Traditional defined benefit employer pensions work well only for the longest term workers who stay with the same employer for 20-30 years. Even these workers will mostly find that their pensions plus Social Security only cover half to two-thirds of their preretirement income.
But to address this problem, the entire conference is organized intellectually around ways to hector, cajole, and pressure American workers to increase their personal retirement savings. The briefing papers distributed to delegates offer these helpful suggestions that could be promoted to Americans as ways to increase their personal retirement savings: eat out less often, shop for groceries more carefully, cut back on extras for the kids, spend less on clothing, cut back on vacations, go to the movies less often, spend less on beauty care products and services.
The problem is that the American people are not interested in these solutions, as the briefing papers also make clear. Most workers believe they are not making enough money to add substantial personal retirement savings on top of what they are already paying for Social Security, Medicare and pensions. Indeed, almost half of Americans are carrying credit card debt to maintain their current consumption.
What the intellectual organizers of the conference fail to realize is that most people care about their standard of living before retirement at least as much as after retirement. With total taxes already taking about 40% of the income of the average family, more than they spend in food, clothing, and shelter combined, there is just not enough left for a substantial personal saving add-on to Social Security.
Of course, as in just about every other issue, the American people are right on this question, and the self-appointed, elitist, scolds are wrong. For the American people are paying more than enough into Social Security to solve the retirement savings problem, if they got their money’s worth out of the program.
The problem with Social Security is that it doesn’t involve any real savings at all. The great majority of funds paid into the program are immediately paid out to finance current benefits. Even when there is a surplus, that money is lent to the Federal government and spent on other programs, with Social Security just receiving more government debt in return.
If these funds were saved in the private sector instead, they would be invested in private productive capital that would produce new income and wealth. These new resources would finance full market returns on the private savings, which in turn would fund much higher benefits than Social Security.
Cato’s newest book, A New Deal For Social Security, co-authored by Michael Tanner and myself, shows how much more. With Social Security funds invested in the private sector instead, an average income two-earner couple earning just over half the average return in the stock market over the last 70 years, or 4% after inflation, would retire with just over $1 million in today’s 1998 dollars. That fund would finance an annuity paying them $109,000 per year as long as both spouses live, and $61,000 as long as one spouse lives, again in today’s dollars.
This is over 3 times what Social Security would pay, and substantially more than these workers would be earning in the future just before retirement. At investment returns closer to the higher market averages, these benefits would be even higher, by a wide margin.
So if Social Security were just reformed to allow workers such a personal, investment account option, as is being done in other countries around the world, the retirement savings option would be eliminated. Through the private system, workers could expect to more than replace their preretirement income using the funds they and their employers would otherwise pay into Social Security. This is true of low income workers as well.
Unfortunately, the legislation creating the Retirement Savers Summit prohibited Summit delegates from discussing Social Security. The original sponsors wanted to set aside discussion of the politically difficult Social Security issue, and discuss the other aspects of retirement policy. But Social Security cannot be intellectually separated from these other retirement policy problems, for fundamental reform of the program is the only viable solution to these problems.