IN a visionary move that seeks to bridge the New Deal and the new millennium, two Senate risk-takers recently introduced legislation to overhaul the imperiled Social Security program by tying it to private investment.
The Personal Investment Plan Act of 1995, sponsored by Sens. Robert Kerrey (D) of Nebraska and Alan Simpson (R) of Wyoming, would allow workers to redirect 2 percent of their current Social Security (FICA) contributions into Personal Investment Plans, or PIPs.
Some interest groups have branded Kerrey and Simpson as heretics trying to short-circuit the third rail of American politics, but the senators enjoy broad cross-generational support. Eighty-two percent of Americans 18-34 would be willing to invest at least part of their FICA contributions privately, according to a national poll our organization commissioned last September.
To date, however, America's leaders have heard only a faint squeaking for PIPs from the public. But if Wall Street were to invest even the most modest sums to educate Americans about reasonable alternatives to the present system, public acclaim for private investment would follow. The political winds would then shift sufficiently to pass Kerrey-Simpson, thereby reaping a windfall for investors and shoring up our outdated national retirement system.
Assessing the risks
Under Kerrey-Simpson, workers would incur some risk. But consider what they already face: a Social Security system that, according to its trustees, is scheduled to go bankrupt before anyone below age 35 retires.
What would a Kerrey-Simpson system mean to an average worker? Conservatively, assume that a laborer earns $25,000 annually - with no raises - during a 45-year career. Contributing 2 percent of gross salary, or $500 per year, into an IRA mutual fund with an average annual real return of 4 percent would yield $60,515 in today's dollars.
Monthly interest from that $60,515 could provide a modest cushion for middle class retirees of the future, especially if it augments their anticipated Social Security benefits from a shored-up system. While this is the senators' main goal, there are other upsides to Kerrey-Simpson.
First, it would encourage procrastinating Americans to plan for their retirements now, especially if they intend to enjoy any degree of comfort later. If millions of workers were suddenly allowed to invest their unfettered 2 percent - and simultaneously took into consideration what additional income Social Security is likely to provide - they might voluntarily set aside even more money to help ensure a secure old age.
Second, redirecting tens of billions of dollars away from the federal government into private hands would bolster the national savings pool, thereby lowering interest rates and spurring economic growth.
Aiming for full investment
Third, by designing a partially privatized Social Security system, Kerrey and Simpson raise hopes for a fully privatized one, with all the attendant benefits. For example, if the worker cited above were to invest his or her full Social Security contributions (currently 12.4 percent) into an IRA yielding a 4 percent real return, that retiree would accumulate $375,191 in principal by retirement - which would generate a comfortable interest income.
Fourth, Kerrey-Simpson would likely end the trust fund hoax. Under today's system, once all payroll taxes are redistributed to beneficiaries, the remainder is earmarked for the Social Security Trust Fund. In 1995 alone, this surplus will equal $60 billion. Unfortunately, instead of investing this money for today's workers, the federal government will borrow against the trust fund in order to help finance its annual deficit.
If the vast majority of workers started their own PIPs, Americans themselves would shut the trust fund spigot and force greater fiscal accountability on the government. No longer could Uncle Sam borrow against new trust fund contributions.
With the baby boomers' collective retirement quickly approaching, Kerrey and Simpson seek to move America from a crumbling public system to one that will meet the demographic burdens of the 21st century. They know from our survey that young adults have more faith in UFOs than in Social Security's long-term solvency, and wisely offer credible alternatives to the current program.