What Do Younger Americans Have to Gain from Reform?

September 10, 2002

The current Social Security program is going broke. Consider the following:

• An average American born in the 1970s will pay over $200,000 into Social Security (in today's dollars), the biggest tax most workers will pay, but by the time he or she retires the program will be insolvent.
• Social Security's 12.4 percent payroll tax is the biggest tax most workers pay. To remain solvent, Social Security tax rates would eventually have to rise to 20 percent.
• An average wage individual born in 1973 can expect only around a 2 percent return from Social Security, according to the Social Security administration.
• Compared to investing their payroll taxes in guaranteed government bonds earning 3 percent, younger Americans can expect to get back less than 80 cents on every dollar they pay in.

One way or the other, Social Security needs reform.

Reforms based on personal retirement accounts are the best step forward. Personal accounts would allow workers to invest their payroll taxes in broad-based, diversified stock and bond mutual funds. These investments would build value over time, earning far higher returns than the current pay-as-you-go program.

At retirement, account investments would be redeemed to pay monthly benefits substantially higher than the current program will be able to pay.

Personal accounts would give workers ownership over their Social Security savings, something they don't have today. Accounts would also mean greater control: workers could invest in stocks when they were young, but move to safer fixed-income investments as they neared retirement. If an account holder died prior to retirement, the account balance would pass to his spouse, children or a chosen heir. That's something the current program doesn't provide.

Those are some of the reasons younger Americans are the most enthusiastic supporters of reforms base on personal accounts. A July 2002 Zogby International poll commissioned by the Cato Institute found 82.8 percent of likely voters between the ages of 18-29 support voluntary personal accounts. By a more than 2-to-1 margin, younger Americans think the current insolvent Social Security system is riskier than a system of personal accounts. And by a 69 to 25 percent margin, likely voters aged 18-29 think the Enron scandal is a reason to support increased individual control over retirement savings through personal accounts.

Social Security must change for the future. Shouldn't we give younger Americans the type of change they so clearly want?

Register for Social Security and Young Americans, a Cato event series cosponsored by America's Future Foundation and Third Millennium. The series kicks off this coming Tuesday with speakers Matthew Moore of NCPA, Meredith Bagby of Third Millennium, Sarah Harding of EPI, and Shaun O'Brien of AFL-CIO. Also, Andrew Biggs will address "Who's Cutting what? Comparing Costs and Benefits in the Social Security Reform Debate?"

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