Union Leaders Should Support Individual Accounts

October 24, 2003

In a special report for the American Prowler, David Hogberg, a research analyst for the Iowa's Public Interest Institute, presents the findings of his latest study, "Social Security Reform and Union Households in Iowa." His study investigates three personal account reform options and their effects on household retirement income. The results, he argues, should convince union leaders—the biggest critics of personal retirement accounts—to support Social Security reform.

He writes: "Under a system of PRAs, workers would have the option of diverting a portion of their payroll tax into their own PRA, much like a private 401(k). The funds in these accounts would be invested in portfolios including equities and bonds that offer better returns than the current Social Security system. In exchange for using these accounts, part of the return on the investment would be used to cover the deficit in Social Security.

"My study modeled the PRAs on three reform plans: the 4 percent Plan modeled on Plan 2 of the President's Commission to Strengthen Social Security which allows workers to invest 4 percent of their payroll up to $1,000 in a PRA; the 2.5 percent Plan modeled on the plan authored by Rep. Nick Smith of Michigan that allows workers to invest 2.5 percent of payroll in a PRA with additional funds being put in PRAs of low-income workers; and the 3 percent-Bond Plan modeled on the plan authored by former Cato Institute scholar Andrew Biggs which allows workers to invest 3 percent of payroll in their PRAs with an additional 2 percent being invested in government bonds.

"The study examined what the PRAs would return when invested in both funds from Fidelity, a well-respected investment firm, and the Thrift Savings Plan, the retirement program for Federal employees The results show that a system of PRAs is a much better deal for today's workers. A couple age 25 making the median income for a union household in Iowa would have under the 4 percent Plan an average of $870 more per month in retirement income over what Social Security promises, an average of $1,717 more under the 2.5 percent Plan, and $1,152 more under the 3 percent-Bond Plan. A low-income union household in Iowa also fares much better, netting an average of $377, $423, and $256, respectively, under the three plans.

"The benefits are by no means limited to union households. The same methods employed in the study can be used to estimate benefits for any household in America. A 25-year-old household making the median income ($42,228) could expect under the 4 percent Plan to have an average of$1,366 more in monthly benefits over what Social Security promises to pay, $2,295 more under the 2.5 percent Plan, and $1,842 more under the 3 percent-Bond Plan. A household making just under the poverty level ($18,000) can expect $798, $648, and $558, respectively, under the three plans.

"The study has other strengths as well. Critics of reform often contend that greater administrative expenses, called expense ratios, would be incurred under a reformed system. Yet, the numbers above reflect the fact that the study included expense ratios for PRA's invested in the Fidelity funds. Other critics contend that the stock-market decline of the last three years shows that personal retirement accounts are too risky. Again, the above numbers reflect the fact that the study included the stock market returns from the last three years in the PRAs.

"Left unchanged, the Social Security system will force future workers to face some very unappealing choices: Workers will either have to pay payroll taxes of over 19 percent by 2020 and over 24 percent by 2030, or face benefit cuts of 27 percent in 2042, and 35 percent in 2077.

"The three plans above offer a better option. They return the system to long-term solvency. They protect the benefits of current and near retirees. And they yield better benefits than the current Social Security system. Personal retirement accounts are a reform whose time has come."

For more information on the benefits of individual accounts for union workers, see Michael Tanner's "Union Workers Should Support Social Security Choice."

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