President George W. Bush would let workers save for their retirements with personal accounts in Social Security. But what if such accounts had been in place for the more than 70 million Americans in the "baby boomer" generation who are now in their 40s and 50s? What if, in 1964 when the oldest baby boomers were 18, President Lyndon B. Johnson declared that America should have an "ownership society?"

Using data from the Federal Reserve and the Census Bureau, a new report from the Center for Data Analysis answers these questions.[1] The results are astounding:

• Personal retirement accounts would have increased retirement security by some 30 percent for baby boomers;
• Personal retirement accounts would have substantially increased the net worth of baby boomers, especially low-wealth families;
• About 98 percent of baby boomers would have been better off had they been able to take advantage of personal retirement accounts; and
• With personal retirement accounts, baby-boomer families could have increased their retirement wealth by between $41,000 and $214,000 at age 65, in inflation-adjusted 2001 dollars.

Though only the youngest baby boomers could now benefit from personal accounts in Social Security, this research underscores the tremendous potential that personal accounts hold for Generation X and its successors.

Defining the Question

Social Security reform has become a central policy issue for the second term of the Bush Administration, with the President vowing to spend his political capital to modernize the government-run pension system. This drive for reform comes at a time when the baby boomers, the largest generation alive in America today, will begin reaching retirement age in just a few years.

The research described in this paper poses a novel question: What if Social Security reform, of the sort that President Bush now proposes, had been in effect in 1964, when the first of the baby boomers started working? How would that have affected their retirement security and their wealth holdings generally?

To answer these questions, I began by estimating the Social Security benefits of the baby-boomer generation, defined as those individuals born between 1946 and 1964. These payments represent the "wealth" attributable to the government-run Social Security system.

Then I estimated the wealth created if baby boomers had been able to divert a portion of their Social Security payroll taxes into their own individual accounts. In this analysis, workers with the highest incomes would be able to divert 2.5 percent of their earnings into these accounts, while lower-income workers would be able to divert more, on a sliding scale, up to 7 percent of earnings. Workers would then invest their accounts in an equal mix of stock and bond funds.

This analysis compares retirement security under the present system with a reform scenario. Under the present system, an individual's retirement security includes the scheduled benefits from the Social Security system, along with personal savings and other net worth (real estate, pensions, investments, and the like, minus mortgages and other loans).

Under the reform scenario, an individual's retirement security would include the value of his or her personal account, a reduction by half in scheduled Social Security benefits (to avoid double-dipping), and other personal net worth (as above).

Personal Accounts Increase Retirement Security

The results are clear: Individual accounts show remarkable promise for increasing the net worth and retirement savings of working Americans. With very few exceptions, millions of baby boomers could have used personal accounts, working in conjunction with traditional Social Security, to improve their retirement income. With personal accounts, the average baby-boomer family could have seen its wealth increase by about 30 percent.

But are the rewards of personal accounts available to workers of all incomes? As a follow-up analysis, I divided the baby boomers into ten groups of equal population size (or deciles) on the basis of net worth. The first decile refers to the 10 percent of baby boomers with the lowest net worth, while the top decile refers to the 10 percent of baby boomers with the highest net worth.

Chart 1 shows these deciles' average net worth with and without personal retirement accounts in Social Security. From the poorest to the richest, families of every economic status would have made considerable gains with personal retirement accounts. If baby-boomer families had been able to take advantage of personal accounts throughout their working lives, they would have gained between $41,000 and $214,000 by age 65 in inflation-adjusted 2001 dollars.

An even more detailed analysis shows that some 98 percent of baby-boomer families would have been better off with this kind of Social Security reform. For the two percent left behind, government policy could be fashioned to make sure that a basic safety net remained intact.

Conclusion

The "ownership society" that President Bush promotes, and particularly personal accounts in Social Security, would have helped baby boomers achieve greater retirement security today if it had been enacted some 40 years ago:

• Personal retirement accounts would have increased baby boomers' retirement security by some 30 percent;
• Personal accounts would have substantially increased baby boomers' net worth, especially among low-wealth families;
• Almost all of the boomers would have been better off with personal accounts; and
• With personal retirement accounts, baby-boomer families could have increased their retirement wealth by between $41,000 and $214,000 at age 65, in inflation-adjusted 2001 dollars.

In most cases, personal accounts in Social Security would have allowed baby boomers to accumulate wealth in the hundreds of thousands of dollars. This increased wealth would more than make up for the reduced level of traditional Social Security retirement benefits.

Moreover, personal accounts could have helped millions of American families build savings and accumulate wealth that they could choose to use during retirement or to pass on to future generations. Ultimately, such reform could have provided millions of individuals with the opportunity to attain greater economic security and independence through their own assets.

Sadly, the baby-boom generation is nearing retirement, and only the youngest baby boomers could now benefit from such Social Security reform. Even so, this research underscores the tremendous potential of personal accounts for Generation X and its successors. Congress owes it to the American people-and especially younger workers-to create such an "ownership society" this session.

Kirk A. Johnson, Ph.D., is Senior Policy Analyst in the Center for Data Analysis at The Heritage Foundation.