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MR. MATTHEWS: The Congressman had to slip out to vote. When Governor Pete du Pont started talking about privatizing Social Security, he wasn't anywhere near eligible to be in the program. It has taken a few years. But now, people are beginning to listen to him.
And so, they're asking him "What should we do on Social Security? How do we resolve this problem?"
Governor Pete du Pont was a two-time Governor of Delaware, presidential candidate in 1988, joined with the NCPA as our policy chairman about three years ago to bring the sort of wisdom and political insight that he had been providing for his constituents in both Congress and as Governor for many years. He is here to talk to you about the Social Security issue. Governor Pete du Pont.
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Governor du Pont
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Well, my task on the program is to talk about those few lucky Americans who had a private retirement system instead of Social Security. Now before you rush to the door, know that all of you who work for the United States Congress are not allowed to be in that group. In fact, only a very small group of municipal employees, municipal government employees across the country are eligible, and I want to talk to you about what some of them have done, because it is a snapshot of what all of us could be enjoying if we moved to a private option in Social Security.
First though, a couple of comments. You've heard Steve Forbes and both the Congressmen talk -- all three of the Congressmen talk about the coming shortfall. But when you put it in graphic form I think it's very dramatic. You see that the red ink gets larger and larger, and for all of you young staff members who are in the audience, don't get too excited. You're way over here somewhere. You're not even within the first red bar.
So, there is a very serious problem. There will not be enough money to pay full benefits in 32 years, and as several speakers have said, in 2012 the lines cross and that's only 15 years away, and then we will be spending more than we're taking in.
There is an enormous unfairness built into the Social Security system the way it exists. You pay 12 percent on the first $62,700 that you earn. If you were born in 1900, your return on Social Security will be about 12 percent if you live to your life expectancy. If you were born in 1950 the return will be 2 percent. If you were born today it will be negative. You will get back less than you put in.
The system is particularly unfair to people who don't live as long as others, people who live in urban America, live shorter lives than people who live in rural America. They are penalized.
Minority males are particularly penalized. Only 349 of 1,000 black males live to be 75. The other 600-and-whatever that arithmetic is are having their Social Security benefits reduced because they don't live long enough to collect them.
The beauty of moving into a market system is that all of these inequities go away. Everyone is treated fairly, everyone is treated the same, everyone has an opportunity to have a bigger nest egg on their retirement.
You've heard the other speakers say also that there are three alternatives. We can, in round terms double the benefits. We can in round term double the taxes. We can in round terms have the benefits, or there is a third alternative which is moving to a market account.
There is a moral reason to move to a market account and that is that our children ought not morally be paying for our retirement. We should be paying for it ourselves. The government should not be owning our retirement assets, we should own those assets. The government should not control the size of our retirement check, that's a decision that each of us as an individual ought to make.
Social Security was set up at a time when people trusted government more than they trusted the marketplace. Today that situation is reversed. People trust the marketplace more than they trust the government, and so it's time to move to a marketplace system.
We have a retirement system that, if it's going to remain viable, not only is going to have to raise taxes, but we're going to have to have more tax payers, and that means we're going to have to encourage women to have more children; we're going to have to let in more immigrants; or we're going to have to undertake political manipulations to draft into the system those people who are not in it today. It seems to me a retirement system ought to depend on individual choice, not on some demographics that are required by the political system.
The current system is somewhat of an insult, as Steve Forbes said, to the intelligence of the American people. If they can privatize their system in Chile, if they can privatize it in Singapore, if they can privatize it in Great Britain, are we Americans simply unable to do that? And the answer is of course not.
And finally, on the moral case, the theory of the 1930s, when Social Security was born, the theory of the 1930s was the human being is a small cog in a great big machine. That was the theory of the Soviet Union. That was the theory of big government in America, that you were a little human being and this vast bureaucracy of the Industrial Age would take care of you. Today that theory is reverse. The emphasis is on individualism and liberty. We are not part of a big machine, we're people and we have individual choices and individual options.
Some of the people who have exercised those options have had extraordinary results. And I want to bring to your attention today some counties outside of Galveston, Texas, who back in 1981, when it was still permitted by federal law to opt out of Social Security, did opt out. They voted as members of their union not to participate. They had a referendum within the union, it was a hard fought battle. They were split on whether they should withdraw or not, but they did withdraw. And they put together something called the Alternate Plan. And it deducts the same amount that Social Security deducts from the paychecks of these employs. There's about 5,000 of them so it's a good sample.
Half is deducted from their paycheck and half is paid in by the county government, their employer. But instead of the money going to Washington and the Social Security system, it goes into a private pension account.
Over the past dozen years, since 1981 when they approved the plan, and they began investing a few years later, in the past dozen years the fund has earned an average of 6.5 percent real return a year. By contrast Social Security of course doesn't grow at all. It's insurance and there is a fixed payment at the other end.
A hypothetical young entry-level employee in this system retiring today after making a $20,000 a year salary over 40 years of deposits, would own $383,000 in nest egg. Under Social Security of course, when you retire you own no nest egg at all. If you should die in the second month after retiring, your Social Security benefits are essentially over. You don't own the principal that is generating that retirement fund.
If you took that $383,000 and invested it with an insurance company you could get a monthly annuity of $2,740 for the rest of your life. Social Security pays $775 a month for the rest of your life.
So the question to ask the Social Security Administration and the professors in the law schools that support the Social Security system is under what principle should you tell an American that they must have $775 a month retirement income instead of the $2,740 that they could have?
Now we've debated this, John Goodman and I, on a great many occasions. The only answer you get out of the other side is, "Well, we have a social insurance system."
It seems to me to say to a low income working person that you could retire on $2,740 a month but we're not going to let you, we're only going to give you $775 because we have a social insurance system. It seems to me that's a long way from a satisfactory answer.
The other question that's always raised is whether the market is too risky. And so, Professor Jeremy Siegal up at the University of Pennsylvania undertook an analysis of market risk since 1802 and that was early in my first term in Congress, and he looked at every year from 1802 to 1992. The best year he could find, the stock market went up 67 percent and the worst year he could find the stock market was down 39 percent. That the Dow Jones industrial grouping.
Now that's pretty risky, isn't it? That's a 106 percentage point swing. So then, Professor Siegal said well instead of looking every year, suppose I did a five year average. I see how stocks did from 1802 to 1807, and then from 1803 to 1808, and 1804 to 1809 and so forth. Well, over a five year horizon the best return was plus 27 percent and the most negative return was minus 11 percent. So instead of a 106 percent swing, you're now down to a 38 percent swing.
And then, Professor Siegal moved to 20 year analyses, and here the results were amazing. The best return was 12.6 percent positive, and the worst return was 1.0 percent positive. In other words, looking at American history in 20 year bites, there has been no 20 year period in which you began to invest your money if you held it for 20 years, that you would lose money.
Well there isn't too much risk in the marketplace. As Steve Forbes says, the real risk is staying with Social Security.
In short, instead of conscripting more people into the government system, the opposite would be the better choice. The opposite would be to set the rest of us free to go down and go to work for those counties outside of Galveston, in theory now, and have a private pension system, measured return is $2,700 instead of $775. We are not small parts of a big machine, we're individuals. Our birth right is liberty. We've been freed by technology and the marketplace to be able to have a system that gives us three times the retirement income of the system we have. The question is why shouldn't Americans be able to take advantage of it? And the answer is they should. It's just that the politicians are a little behind. Our job is to educate the politician so that most Americans have a better retirement than they have today. Thank you.
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