Debt shows need to personalize Social Security

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In an effort to re-energize the youth vote that was crucial to his 2008 victory, President Obama spent this week speaking about student loan debt.

Stopping at colleges in the swing states of North Carolina, Colorado and Iowa, Obama pushed for Congress to maintain a 3.4 percent interest rate on government-subsidized loans.

In reality, government-financed student loans are a subsidy for colleges. The wider availability of low-interest loans only allows them to charge ever-higher tuition without endangering their ability to attract students.

But if Congress really wants to do something for America's youth, it should allow those college graduates who are joining the work force to invest a portion of their payroll taxes into personal retirement accounts.

The idea of Social Security personal accounts has been politically dead since President George W. Bush's failed attempt to create them in 2005. The financial market crash of 2008, coupled with the growth in the nation's deficits, has scared off even those who support the idea in theory. During his presidential campaign, Rick Santorum, a proponent of the accounts going back to the 1990s, called the idea of creating them now "fiscal insanity."

Yet the current focus on student debt is a good opportunity to point out that such accounts would help address one of the central dilemmas of retirement planning. Given the wonders of compound interest, investments from earlier in life make a dramatic difference in how much people can save for retirement. Unfortunately, though, that's also the hardest time to invest. When college graduates enter the work force, they're typically earning entry-level salaries. After their student loan payments, many have little left to save for retirement.

In 2010, students graduated with an average of $25,250 in education loans, according to the Project on Student Debt. Thus, if a typical graduate were to make payments of $200 a month, it would take him 13 years to pay it off. That's a lot of lost investing time.

According to the calculator on personal finance website Moneychimp, a 22-year-old who invests just $1,000 annually for his entire career and earns a relatively modest 5 percent annual return would have $150,143 by the time he reached 65. But if he waits until after his student loans are paid off (age 35) to make the same investments, he only ends up with $69,761 at retirement age, or less than half.

Opponents of Social Security accounts point to recent volatility in the stock market as evidence that they're too risky. And it's true that over the past five years, returns from the market have been essentially flat. But over the course of a lifetime, short-term fluctuations become less important. If you invested in the S&P 500 index 40 years ago, you would have realized average annual returns of nearly 10 percent. Every dollar invested would have turned into $43, according to Moneychimp.

If younger workers are allowed to divert a portion of the payroll taxes deducted from their paychecks into investment accounts, they could begin compounding earlier, while they're still paying off student loans.

Personal accounts would not increase deficits over the long term, because they would also reduce the government's future obligations. It is true that in the short term this would increase deficits. But Obama and the Democrats already crossed this Rubicon when they pushed for the payroll tax holiday that is currently in effect for the second year running. The difference between the holiday and personal accounts is that individuals would actually be using the money to build up retirement savings.

Liberals like to measure their compassion for America's youth in terms of how much they would make government subsidize tuition-hiking colleges. Conservatives shouldn't shy away from pushing polices that would allow younger workers to invest their own money sooner.

Philip Klein is senior editorial writer for The Examiner. He can be reached at pklein@washingtonexaminer.com.

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