March 11 2013
American Enterprise Institute resident fellow Alex J. Pollock poses an intriguing question:
Would you rather save for retirement by building equity in a house or by putting money in an underfunded government program?
The question is both immediately timely (is your stomach in a knot over April 15?) and full of long term implications.
Social Security takes 12.4 percent of our incomes every year—half that directly from us and the other half from our employers, who must pay into Social Security on our behalf.
Not only is the money going into a troubled program but we as individuals might be able to use it better, including buying a house.
By contrast, the government’s idea of helping people become homeowners has been pushing riskier loans and low down payments. We saw the result of these policies in the bursting of the housing bubble, when many people who never should have been given loans in the first place found that they were unable to make payments. Personal tragedies ensued.
If so much of an earner’s money weren’t going to Social Security, Pollock suggests, she might have been able to become a homeowner without taking out a risky loan. Pollard puts forward a plan: people up until the age of 35 could opt to pay reduced amounts into Social Security and have the difference put into a restricted fund which could be used only to make a down payment on a house.
In the eight years between the ages of 24 and 32, you will have paid more than $44,000 in Social Security taxes from your income. Suppose that instead this money had been put in a special restricted savings account for accumulating a down payment on a house. Even with Bernanke-level interest rates of less than 1 percent on savings, you would have about $45,000.
That would provide a sound, 20 percent down payment on a house costing $225,000. The median house price of an existing home in the United States is now about $180,000. You get an 80 percent traditional mortgage that amortizes in 30 years. If you pay it off on schedule, you will own the house free and clear at the age of 62. If over those 30 years you get the long-term U.S. average house annual price increase of 3 percent (2 percent inflation plus 1 percent real), the house you own, debt-free, at age 62 will be worth about $546,000. If the annual house price increases cover only the 2 percent inflation, your home will still be worth $408,000. Nothing wrong with that as a retirement savings program, as our grandparents and great-grandparents thought was obvious.
Of course, if you pay fewer taxes into Social Security, you should have correspondingly lower benefits in later years (considering whatever benefits Social Security will by then be able to afford). But in exchange you will really own the house! Moreover, you will have been able to afford a proper down payment at the right time of life, when you have a young family.
Which is a better deal? And who should get to decide?
What is so appealing about Pollock’s proposal—other than improved chances of homeownership—is that the taxpayer gets to decide.
But for a government that is increasingly intrusive this is likely to be the biggest drawback.