Weighing Benefits: Would a Private Retirement Fund Yield Far More Benefits for Workers Than the Current Social Security System, Even during Years When the Stock Market Is Down?
Eddlem, Thomas R., The New American
President Bush has repeatedly suggested a partial privatization of Social Security that would involve "allowing younger workers, on a voluntary basis, [to] set aside some of their own payroll tax in personal accounts as part of a comprehensive solution to dealing with the Social Security issue." Specifics about the Bush Social Security "reform" proposal have yet to be announced, though most pundits expect a modest proposal in several months to allow workers to voluntarily divert up to four percent of their income--currently going into Social Security--into a federally managed private stock fund similar to the federal government pension system.
In response to the Bush proposal, leftists across the nation have shrieked in horror that investing in stocks is too "risky" compared with investing in the federal Social Security program. Boston University Professor Alicia Munnell opined in the Boston Globe that "using historical rates of return on stocks, without any adjustment for risk, is clearly improper and overstates the contribution of private accounts to retirement security." In the New York Times, Swarthmore University Professor Barry Schwartz called pro-privatization arguments "dubious, or disingenuous, or both."
Countering the notion that allowing private investment would be too risky, Vice President Dick Cheney claimed on January 13: "The answer to this concern, of course, is simply to set guidelines, basic standards of safety and soundness when it comes to investment choices." That is, the private stock fund would be limited to government-approved investments. But to what extent? Would the federal money managers be able to manipulate the market by which investment choices they approve or reject? Would the so-called private stock fund really be private?
Regardless of the still-to-be-announced details of the president's plan, the public perception is that President Bush is calling for privatizing Social Security, and that perception is fueling a welcome debate as to whether it should be privatized. Specifically, would a private fund yield a higher rate of return than Social Security? And would a private fund pay as much as Social Security during a major downturn in the stock market?
THE NEW AMERICAN first answered these questions in 1994 ("America's Retirement Rip-off," April 18, 1994), when it published a study contrasting the benefits of Social Security with that of a stock fund annuity for four hypothetical families.
In 1994, 65-year-old retirees who derived their retirement income from Social Security enjoyed roughly the same monthly payments as those who derived their retirement income from a private stock fund, but the ones relying on Social Security payments would lose more than $160,000 in death benefit in 1994 dollars. Assuming that an average 65-year-old worker retiring in 1994 had a spouse who never entered the paid workforce, Social Security actually paid nearly $100 more every month than a stock fund--as long as both spouses survived. But the analysis also revealed that younger workers had to contribute more to Social Security for a decreasing benefit.
Eleven years later, it is now very clear that young people in the workforce would be better served by being allowed to invest their own money for retirement rather than relying upon Social Security. Private funds pay out far more to the average worker--both in monthly benefits as well as death benefits--than Social Security does.
An Average Couple: Wendell and Anna Quinlan
Consider the case of Wendell and Anna Quinlan, an imaginary couple who turned 65 years old on January 1,2005. Like many men in his generation. Wendell served as the primary breadwinner in the family, earning an average income. Anna served as a full-time homemaker. Therefore, Anna stayed out of the paid workforce and didn't contribute to Social Security (or the private stock fund) and won't be able to collect on her own policy. …