Women in the So-called Safety Net

by Darcy Ann Olsen

Darcy Ann Olsen is an entitlements policy analyst at the Cato Institute.

Women in Virginia may be headed for retirement trouble. Currently one in seven Virginia women over age 65 lives in poverty. And the older women get, the worse off they become. Twenty-one percent of Virginia women over age 75 live in poverty.

Why is that happening? What has happened to Social Security, America's retirement safety net? The little known truth is that Social Security has never been a successful anti-poverty program. Indeed, every year, roughly 15 percent of America's elderly women fall through this so-called safety net.

To make matters worse, the Social Security Administration says that, unless taxes are raised or retiree benefits are cut, Social Security will be able to fund only 75 percent of benefits in the future. Today, the average monthly Social Security benefit for women in Virginia is only $610. Imagine what would happen if 25 percent of that were taken away.

The good news is, it doesn't have to be this way.

According to researchers at Harvard University, virtually all women would be better off in retirement if they were allowed to place their FICA taxes in personal accounts, similar to IRAs, that could be invested. For example, a married woman who earns roughly $11,000 a year can expect $550 per month from Social Security. If she could put her FICA money in a personal retirement account, she could expect $1,200 per month. That's $650 a month more than Social Security, or twice the return, for the same money.

There is nothing mysterious about personal accounts outperforming Social Security. The truth is that it isn't hard to design a system that brings home more than Social Security. Workers retiring today get a measly 2 percent return from Social Security on the money they've paid in. America's youngest workers fare even worse. They can expect a negative return on their money, according to the non-partisan Tax Foundation. On the other hand, the average annual real return on U.S. stocks from 1926 through 1996 was 7.56 percent. Even low-risk investments, such as government bonds, typically yield a 3 or 4 percent return. Either way, it's easy to come out ahead of Social Security.

Skeptics say such a system might work fine for experienced investors, but not for women who generally have less investment experience than do men. But American women have a strong investment track record. In fact, 60 percent of women consider themselves knowledgeable investors. Regardless, private accounts do not require us to have investment experience. The history of 401(k) plans and IRAs suggests that we can receive excellent guidance from experienced account managers. In addition, personal accounts can be structured to keep out scam artists and restrict investment strategies that are either too risky or insufficiently aggressive to provide needed retirement benefits. Finally, most proposals for personal accounts are coupled with a safety net to protect any worker, male or female, in the event of misfortune.

To keep Social Security afloat, some policy makers have suggested "fine-tuning" it. Sometimes that means raising taxes on workers, as politicians have done 38 times since the program's inception. Other times it means cutting benefits to retirees, such as raising the retirement age. Certainly, if politicians raise taxes high enough or cut benefits enough, Social Security could be made solvent for a few more years. Trouble is, raising taxes or cutting benefits reduces the value of an already inadequate benefit. Such actions make the program a worse deal for the people who depend on it most.

Forcing women to pay into a system that takes 12.4 percent of their wages only to cheat them of a secure retirement is simply unjust. A new Social Security system of personally controlled accounts would stop that injustice. It would ensure that all Americans would be on the path to real retirement security, not just the path of Social Security's shaky promise. A promise that, for too many women, grows emptier every day.

This article originally appeared in the Fort Pierce Tribune, November 1, 1998.