The primary issue for 2016 Democratic presidential candidates appears to be economic inequality—both income and wealth. They have two solutions: raise the minimum wage and redistribute wealth.
The far better solution, both for individuals and the economy, would be to let lower-income workers create and accumulate wealth.
Arguably, their greatest source of wealth is something they don’t even have a property right to: Social Security. Workers pay a 12.4 percent payroll tax into the Social Security system for 40 or 45 years—approximately $337,000 for a worker making the average wage and retiring in 2015, according to economists at the Urban Institute. But if Congress wants to rob them of their Social Security benefits by cutting or delaying them, it can.
What’s known as the “Alternate Plan” does not follow the traditional defined-benefit or defined-contribution model. Rather, employee and employer retirement contributions are pooled and actively managed by a financial planner that invests the funds with highly rated financial institutions. Think of it more like a banking model—e.g., savings account or CD—rather than an IRA model, where the individual controls the investments.
Those institutions guarantee a base interest rate—usually about 3.75 percent—which can increase if the market does well. Over the last decade, the accounts have earned between 3.75 percent and 5.75 percent every year, with an average of around 5 percent. The 1990s often saw even higher interest rates, 6.5 percent to 7 percent.
Thus, when the market goes up, employees make more; but when the market goes down, employees still make something, virtually eliminating the problem of workers deciding not to retire because of major drop in the market. And most will retire with much more money. According to the Alternate Plan’s financial administrator:
- A middle-income worker making $51,200 would get about $1,540 monthly from Social Security, but $3,600 from the Alternate Plan.
- And a high-income worker who maxed out on his Social Security contribution every year would receive about $2,500 a month from Social Security compared to $5,000 to $6,000 a month from the Alternate Plan.
But Social Security is not just a retirement fund. It is social insurance that provides a death benefit, survivors’ insurance and a disability benefit. Thus, part of the contribution provides a term life insurance policy, which pays four times the employee’s salary tax free, up to a maximum of $215,000. That’s nearly 850 times Social Security’s death benefit of $255.
If workers participating in Social Security die before retirement, they lose their contribution (though part of that money might go to surviving minor children or a spouse who never worked). Workers in the Alternate Plan own their account, so the entire account belongs to their estate. There is also a disability benefit that pays immediately upon injury.
What the Alternate Plan has demonstrated over 30 years is that personal retirement accounts work, with many retirees receiving more than twice what they would from Social Security.
More importantly, this retirement solution addresses the problem of wealth inequality. Middle-income workers can easily retire with $500,000 or more in their accounts.
To put that in context, the Government Accountability Office (GAO) recently found that half of U.S. households aged 55 and older have zero savings. Of those that do, the median saved is about $109,000. The Alternate Plan would put nearly all workers on a path to wealth accumulation.
A retirement system that is prefunded and safe is not a dream. Three Texas counties have proven it can work. If political candidates really want to address the problem of economic inequality, the Alternate Plan is a good place to start.