Should the United States Privatize Social Security?

By Henry J. Aaron; John B. Shoven et al. | Go to book overview

most beneficiaries are not well-equipped to handle. They would generate lower returns, on average, than would an appropriately reformed Social Security system. In financial terms, an asset that is riskier and has a lower yield than is available elsewhere is definitely a bad deal. That, alas, is my verdict, on private accounts.


Notes
2.
The buildup in defined-contribution accounts tends to be slow. If constant sums are deposited periodically and earn an average real annual rate of return of 5 percent, the balance after twenty (ten) years will be only 24 (10) percent as large as it will be after forty years. If the deposits are a constant fraction of earnings that grow 2 percent annually in real terms and prices are rising 3 percent annually, the accumulation (again at a real return of 5 percent) after twenty (ten) years will be only 13 (3.5) percent of the accumulation after forty years.
3.
Geanakoplos et al. ( 1998).
4.
This calculation assumes contributions to financial accounts equal to payroll taxes of 2 to 6 percent, an 8 percent annual nominal yield with all funds reinvested, and management costs averaging 1 percent of funds on deposit. In fact, average annual administrative costs in the United Kingdom run 1.6 to 2 percent, depending on the size of the account.
5.
The British system is marked by high costs of funds management. As cited by Diamond ( 1997, p. 49), the government actuary of the United Kingdom reports that administrative charges under its system of private accounts vary widely but that the charges levied by a typical provider run:
Initial charge: 8 percent of the invested rebate
Annual charge: 0.9 percent of the invested monies
Flat-rate charge: £2.50 per month

If deposits to accounts in the United Kingdom average 2 percent of median earnings covered by Social Security in the United States, annual contributions in the United Kingdom would average about 200 and administrative costs would reduce annual returns by 2 percentage points. If contributions

-109-

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Should the United States Privatize Social Security?
Table of contents

Table of contents

  • Title Page iii
  • Contents v
  • Introduction vii
  • Note xii
  • 1: Social Security Reform: Two Tiers Are Better Than One 1
  • Notes 51
  • References 52
  • 2: Social Security: Tune It Up, Don'T Trade It In 55
  • Conclusion 108
  • Notes 109
  • References 111
  • 3: Comments 113
  • Note 123
  • Summary 132
  • Summary 132
  • References 133
  • Alicia H. Munnell 133
  • Conclusion 144
  • References 145
  • 4: Responses 155
  • Note 159
  • Note 168
  • 5: Rejoinder 169
  • Contributors 171
  • Index 173
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