Social Security Reform Would Give More Americans the Benefits of Stock Investing

Any discussion of how well Americans are doing should begin with an acknowledgement of something we often forget: Americans have a higher standard of living today than ever.

Technological advancement is one reason, but so is economic prosperity. In 1970, 80% of all American households had a car. Today 92% do. In 1970, 34% of Americans had color TV. Today 98% do. 44% of households had a clothes dryer in 1970; today it is 75%. In constant 1997 dollars, the median household net worth was $27,938; in 1997 it was $59,398.

But few dispute that many Americans would benefit from investing more. So how can we encourage Americans to invest?

One way is by overhauling our Social Security system.

There are several problems with our current system. One is demographic: fertility rates are low while Americans are living longer than the government expected when Social Security was adopted in 1935.

Another is that because Social Security exists, many people don’t bother to save for retirement.

A third is that our tax dollars paid into Social Security don’t work for us by gaining in value in the years before we retire, as our private investments do.

One way to cure these problems while giving typical Americans the benefits of stock market investing is to change Social Security so part of our Social Security money creates private, individually-controlled savings accounts for each worker. This would ease Social Security’s long-term cash crunch because workers’ payments would earn dividends and increase in value over their working years.

This system also would give the benefits of stock market investing to Americans who do not currently invest. A new Cato Institute book, “A New Deal for Social Security” by Peter Ferrara and Michael Tanner,1 shows how typical Americans would benefit from private Social Security accounts. Noting that the stock market’s average real return to investors was 7.56% from 1926-96, the authors point out that if a two-earner American family making the average income for males and females invested their Social Security taxes in the stock market and received an average 6% rate of return during their working lives, they would retire with a $1.6 million trust fund. The family with an average full-time worker and a non-working spouse would retire with nearly $750,000.

Britain, Australia, Chile, Hungary and many other nations have adopted some form of this system with excellent results. In Chile workers have the option of putting about half of what we call Social Security taxes into private accounts. As a result, workers are now receiving benefits 200% higher than under the old system. What’s more, the average Chilean has more savings than the average American, even though the average American makes seven times more than the average Chilean.

But more can be done to increase Americans’ saving opportunities. Cutting taxes would increase the amount of money Americans have to invest. The Tax Foundation says that in 1957 a two-earner American family spent a quarter of their budget in taxes, much less than it spent for food and housing. In 1998, a typical two-earner family spent nearly 40% of its income on taxes – more than it spent on food, clothing and housing combined.2

Any plan to spur investing by Americans should remember this simple principle: money paid in taxes can’t be saved.


Amy Ridenour is president of The National Center for Public Policy Research. Comments may be sent to [email protected].


1 Peter J. Ferrara and Michael Tanner, “A New Deal for Social Security,” The Cato Institute, Washington, D.C., 1998

2 “Total Tax Collections Climb to $2.667 Trillion in 1998,” Tax Foundation, 1998; downloaded April 8, 1999 from

The National Center for Public Policy Research is a communications and research foundation supportive of a strong national defense and dedicated to providing free market solutions to today’s public policy problems. We believe that the principles of a free market, individual liberty and personal responsibility provide the greatest hope for meeting the challenges facing America in the 21st century.