Alicia H. Munnell, Peter F. Drucker Professor of Management Sciences at Boston College, was formerly a member of the president's Council of Economic Advisers and Assistant Secretary of the Treasury for Economic Policy.
President Bush wants to “privatize” a portion of the Social Security program. As part of that debate, we should remember that our experience with 401(k) plans provides some evidence about how well such a program might work. The results to date are not encouraging and should serve as a blinking yellow light.
Retirement security for middle-class Americans is at risk. First, the push to privatize Social Security has diverted attention from solving the program's financing problems. Second, unchecked reliance on 401(k) plans has made employer-provided pensions less reliable. Third, the president's "ownership society" initiative has led to policy proposals that undermine pension coverage and splinter the health-care system. Finally, massive budget deficits have now made it more difficult to fix Medicare and Social Security.
Productivity growth is the single most important determinant of our future standard of living.
People can expect their real wages and their living standards to double every 28 years, or roughly once a generation, if capital investment and technological change allow workers to increase their output by 2.5 percent per year. But if output per worker grows at only 0.5 percent, children can expect living standards only slightly higher than those of their parents.