Private Social Security Accounts: Still a Good Idea

As Democrats and Republicans jockey to set Congress's agenda for after the midterm elections, President Obama has already dismissed one reform that would improve Americans' financial standing: allowing workers to save and invest some of their Social Security taxes in personal accounts, say William G. Shipman, co-chairman of the Cato Project on Social Security Choice, and Peter Ferrara, director of entitlement and budget policy at the Institute for Policy Innovation.

Shipman and Ferrara use a model to show how an average couple retiring in 2009 would have fared in the financial crisis if they utilised a personal account set up when they entered the workforce:

  • The couple would have accumulated account funds, after administrative costs, of $855,175.

  • They would have been millionaires a few years earlier, but the financial crisis lost them 37 per cent in 2008.

  • Yet their account, having earned a 6.75 per cent return annually from 1965 to 2009, would still pay them about 75 per cent more than Social Security would have.

    This model assumes that the couple switched to a lower-risk, conservative portfolio that averages a return of just 3 per cent. Social Security, by contrast, promises even lower returns of only 1.5 per cent or less, given the actuarial value of all promised benefits.

    It is a mathematical fact that the least expensive way to provide for an almost certain future liability is to save and invest in capital markets prior to the onset of the liability. That's why state and local pension funds, corporate pension plans, federal employee retirement plans and Chile's successful Social Security personal accounts (since copied by other countries) do so, say Shipman and Ferrara.

    Source: William G. Shipman and Peter Ferrara, Private Social Security Accounts: Still a Good Idea, Wall Street Journal, October 27, 2010.

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    First published by the National Center for Policy Analysis, United States

    FMF Policy Bulletin/ 02 November 2010

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