Suppose you started working in 1959 and earned at least the maximum amount on which Social Security taxes were due each year -- $4,800 back then -- and you put aside an amount equal to the sum that you and your employer otherwise would have paid to the government. Also, suppose this money was invested in the S&P 500 and was compounded annually; no taxes until you were retired. At the end of 1999, you would have had $614,036 in that account. This figure excludes any Medicare taxes. This year, the maximum Social Security benefit paid to a worker will be $16,114. That is equivalent to a paltry 2.6% rate of return if calculated against the $614,036. Actually it is even less, because when you die the government keeps the amount you have paid and does not pass it on to your heirs. If the pay down of principal over your expected life span is taken into account, the actual rate of return on your Social Security contributions is less than 2%. But wait, it gets worse. Back in 1959, only the first $4,800 of earnings was covered, while last year the figure for covered wages and salaries was $72,600. If we extrapolate back to 1959 by the average annual increase in wages, the corresponding sum would have been $11,076; so if you actually were earning that much, Social Security taxes were due on less than half that amount. Now let's look forward and assume that covered wages rise 4% per year, and consider the situation of someone just starting to work this year who always will earn at least the maximum amount covered. Assuming that the stock market generates the same average annual rate of return from 2000 through 2040 as it did from 1959 through 1999, the value of Social Security taxes (again excluding Medicare) paid by you and your employer, assuming tax rates do not change, will be the munificent sum of $8,948,464. If inflation continues to rise at an average rate of 2%, your annual benefits in 2040 under current Social Security legislation would be $35,580 per year, or the same $16,114 as it is now in today's dollars. That's an annual rate of return of less than 0.4%. By comparison, if the money were invested in the stock market and then the recipient received an annuity of 8% per year (taking into account the average expected life span), that sum would generate $715,877 per year, or $324,217 in today's dollars. So you make the choice. Would you rather have $324,217 per year or $16,114? Even Al Gore could get the answer to that one right. So there has to be more to it than that -- and there is. People who love big government and despise private enterprise claim the stock market can't possibly rise as fast over the next 40 years as it did during the last 40 years. In fact, now that the market has corrected, and given the generally favorable outlook for low inflation and budget surpluses, it probably will rise somewhat faster than it did in the 1959-99 period. The main reason liberals hate the idea of market-based Social Security is that it would change it back into what Franklin Delano Roosevelt originally proposed, a pension into which you put your own money, instead of what it has become, a grab bag for the poor and needy. According to current regulations, and I do not expect this part of the legislation to be changed, you are eligible for full Social Security benefits if you have worked as little as 10 years. Also, while there is some gradation in the benefits, those who earned only a small fraction of the maximum covered wages receive proportionately greater benefits. In addition, Social Security isn't just for old age benefits any more. It includes disability payments, which have greatly increased as a proportion of total payments since 1982. In other words, Social Security isn't a pension scheme at all; it's just a welfare scheme. And that is precisely why Al Gore doesn't want to change it, and George W. Bush does. We'll just have to wait and see what actually happens.
Michael K. Evans is president of the Evans Group and professor of economics at the Kellogg School of Business, Northwestern University, Evanston, Ill.