Enron Debacle Shouldn't Zap Social Security Reform

critics of President George W. Bush's proposal to offer workers the opportunity to invest a portion of their payroll taxes for themselves aren't fighting fair.
Some of the critics of President George W. Bush's proposal to offer workers the opportunity to invest a portion of their payroll taxes for themselves aren't fighting fair. But, despite their incendiary arguments, allowing younger workers to set up voluntary private accounts makes perfect sense.

The plan's opponents aren't above employing scare tactics. They're quick to observe that the Dow Jones Industrial Average lost 7.1% in 2001, after a 6.2% decline in 2000 — and, still worse, that the Dow was the least battered of the three stock indexes.

But bear markets come and go. The last time the Dow, the Nasdaq and the S&P 500 all fell for two consecutive years was in 1973 and 1974. The truth is, for long-term investors, the stock market is a hands-down winner.

A recent Texas A&M University study looked at every overlapping 35-year period for the last 128 years and computed that the average annual return on the S&P 500 was 7%, after inflation. Compare that performance with the measly 2% return young workers might reasonably expect on their Social Security taxes.

To add fuel to their fire, those who denounce private accounts are now showcasing the spectacular and shameful collapse of Enron Corp.

Enron's management touted the company's prospects and barred its employees from selling Enron shares held in 401(k) plans, which once had accounted for a staggering 67% of the plans' assets. When the stock's price plunged, thousands of employees stood by helplessly and saw their life savings wiped out.

But the detractors of a partly privatized Social Security system aren't justified in introducing Enron's tragic failure as evidence that private pensions don't work. To the contrary, if the stunning fall of Enron teaches us anything, it is that information, choice, control and diversification are the hallmarks of smart investing. And they're also the ingredients of any responsible private-account strategy.

The Social Security system simply isn't viable over the long term. As it stands, by 2030, every working couple in America will be supporting a retired person. Partly privatizing Social Security is an irresistible step toward solving the problem.

The President's Commission To Strengthen Social Security has recently come up with three alternative proposals. All of them would permit younger workers to set up their own voluntary private accounts. Those 55 and older would be guaranteed their benefits, and benefit cuts that inevitably would affect later retirees are figured to be entirely offset by earnings from private accounts.

The commission's report forecasts what a participant might expect from setting aside just 1% of his pay, matched dollar for dollar by the government. If a 21-year-old "scaled medium earner" — one who now earns $35,277 a year — invests 50% of his private account in stocks, 30% in corporate bonds and 20% in Treasurys, his retirement nest egg is estimated to grow to $523,000 by age 65.

There is no question that Social Security is desperately in need of an overhaul. Yet Congress has been notoriously reluctant to cut benefits or increase taxes to keep the program out of the red. So, let's get behind the President's Commission and its common-sense initiative to restore long-term balance to the Social Security system.

About the Author

Marc Lane is a business and tax attorney, a Master Registered Financial Planner, a Registered Financial Consultant, and a Certified Investment Specialist. Marc is the author of 30 books on business organization, taxation, and personal finance. His newest book, "Advising Entrepreneurs: Dynamic Strategies for Financial Growth" draws from his experience working with those who have successfully built their businesses. Marc is an Adjunct Professor of Law at Northwestern University and an Adjunct Professor of Business at the University of Illinois. His practice areas include Individual Taxation, Corporate Tax Planning, Business Tax Planning, Estate Planning, Investments, Retirement Planning,Elder Law, International Trade, Business Law, and Wills, Trusts and Estates. Additional articles, case studies, and a free email newsletter are available at www.marcjlane.com.

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