May 28, 2014

THE POINT OF PIKETTY:

If Income Inequality Is Caused By The Lack Of Wealth, Then Help Workers Create Wealth (Merrill Matthews, 5/28/14, Forbes)


But what if workers were able to put that same amount of money--their 12.4 percent Social Security (FICA) tax; $5,555 in Stererle's example--into a personal retirement account that could be invested in broad-based equities?

Stock market guru Jeremy Siegel, author of Stocks for the Long Run, claims that since the market's inception U.S. stocks' average long-term real rate of return is about 7 percent.  Financial Advisor magazine estimates that the future long-term real rate of return for U.S. stocks is closer to 5 percent--but both are close to the 6 percent that Picketty only ascribes to the wealthiest.

Using an interest calculator, a $5,555 annual contribution over 40 years at 6 percent grows to about $970,000.  Factor in that wealth and income inequality largely evaporates.  People don't have to be in that top thousandth percent of income to get excellent returns on their money and create real wealth.  All they need is a private property right to keep and invest what they are contributing to Social Security right now.

To be sure, there are financial challenges in transitioning to a system of personal accounts, not the least of which is how to cover the promised benefits of current retirees when workers redirect part or all of their FICA contributions to their personal accounts.  But there are equally great financial challenges with the status quo.

It's time to re-embrace personal accounts.  
Posted by at May 28, 2014 5:37 PM
  
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