Poverty is isolated in the private sector. Public-sector workers’ salaries are almost twice that of private-sector workers, and their pensions are enormous. This is not meant to begrudge public workers, but they would do well to sympathize with their private-sector brethren, since about eighty-five percent of their pension money is paid by private-sector workers and their employers. The fiscal health of public pensions is dependent upon wealth of the private sector.
So what is the ladder out of poverty? The Dow Jones average of equities on January 1, 1975 was 632. Forty-five years later, on January 1, 2020, that 632 had grown to 28,538.
What if we had added an ever-increasing investment, each year, in addition to $632? What if we and our employer added, each year, our 15.3-percent Social Security–Medicare tax into our own private equity fund? The compound savings is staggering.
Had a low-income worker with a lifetime-average taxable income of only $8.10 per hour paid the tax into his own equity fund that tracked with the Dow, and left it unattended, he would have retired with $1,000,258.
A chart proving this is in the book referenced below (on p. 51). The chart uses December 31 annual Dow Jones averages, precise to the dollar. The numbers are not arguable.
The worker need not know what a stock is. He can leave the money in an equity fund and forget about it. Note that the stock market gains included the 2008 financial crisis correction.
Low-income workers would retire as millionaires. Not only would privatized retirement accounts mitigate poverty, but they would nearly eliminate it.
The next chart reveals a more interesting result. During that pensioner’s retirement years, he can spend $78,840 per year up to age 85. What is interesting is that if that pensioner died at life expectancy (age 79), his children would inherit $419,813.
Our generational wealth transfer disintegrates because of Social Security. Privatizing our retirement funds will reverse this poverty-producing system. If the children of a low-income worker can inherit $419,813, wealth will certainly grow from generation to generation.
The Social Security Administration is taxing Peter to pay Paul. Critics are correct: Social Security is a Ponzi scheme. Your account balance drops to zero every year, and nothing is invested.
What is worse, the Social Security–Medicare annual income tax of 15.3 percent has left Baby-Boomers with little to save on the side. Fidelity said (in 2017) that the average 401(k) was only $157,000. Then the Social Security Administration has the gall to pay retirees a median pension of $15,247 (2017), which is below the poverty level for a household of two at $15,877 (2017). Social Security spends workers’ savings, then locks them into or near poverty when they retire.
Most Baby-Boomers must work until they die because of Social Security. Social Security is not saving us from poverty. It is causing poverty.
Efforts to reform Social Security with private accounts have been stymied for years by Democrats, who have demagogued the issue. When Paul Ryan attempted this, Democrats ran a television ad showing a Republican pushing an old lady in a wheelchair off a cliff.
It is best to implement private accounts after an election. Campaigning for it will only prompt more inane lies to protect the broken system. A good economic idea cannot be talked into becoming a bad economic idea.
The Chileans did this, and their Social Security was a copy of ours. Their poverty rate has dropped steadily, from 45 percent in 1980, when they privatized, to 6.4 percent in 2017, according to Macrotrends. José Piñera, the then–minister of labor, also credited the new system for increased growth rate of Chile’s economy, which, he said, “has been growing at the rate of 7 percent, double our historic rate.”
He claimed the labor participation rate increased dramatically because workers saw private pensions growing rapidly. Furthermore, workers were less likely to give up. Think of our homeless population. This may be an effective way to reverse or at least slow our steady growth of homelessness.
Milton Friedman suggested that we give government bonds to future pensioners commensurate with their expected Social Security pension and convert everyone to private accounts. The system for private accounts is already in place with our Roth IRAs. The Internal Revenue Service legislation might require less than half a page. Here is a suggestion:
“The current 15.3-percent Social Security–Medicare tax shall be privatized beginning January 1, _____. These tax monies shall be owned by the taxpayer (payor). During the payor’s taxed years, said funds shall be sent to the payor’s chosen range of mutual funds, which the payor may self-direct. The payor may not withdraw these funds prior to retirement. Upon the payor’s early demise, heirs may inherit the funds by legal process. The retirement age shall be determined by the U.S. Congress, and initially set at age 62. The payor’s account shall be identified as a Social Security–Medicare (SSM) account. Typical and appropriate fund manager rules shall apply. The 15.3-percent tax may not be increased. The tax and the retirement age may be decreased by Congress. Transition to this privatized system shall be an option to the payor. The payor may choose to transition Social Security tax monies only and not Medicare tax monies, or not transition to private accounts at all. This legislation shall not expire, and is not subject to judicial review despite conflicting decisions of any kind.”
Yes, it will take time to promote the idea. However, isn’t a guarantee of your personal wealth, and nearly ending poverty, worth the political effort?
Note: Content published without attribution at the request of the author.
