The Case for Private Accounts
In today's Wall Street Journal, Martin Feldstein makes the argument for private accounts as an alternative to Social Security. I enjoy reading articles like Feldstein's because they use simple math to compare the rate of return on Social Security benefits to the rate of return on rather conservative market investments. And the math doesn't lie. For a median-wage worker, Social Security is paying about half of the annual benefits ($22,000) at full retirement age that a private investment would pay.
But those who argue against private accounts note the security associated with Social Security…a defined benefit for life, regardless of whether a worker saved additional money. But this defined benefit does nothing to enhance a worker's wealth. And lest we forget the argument that since the worker's benefits are based on his own personal earning years, the money that is paid into the system during employment and paid out at retirement belongs to the worker. Does it really? Consider:
1) Unlike a 401(k) or IRA account, a worker has no choice in how the payroll tax is invested. U
nlike a 401(k) retirement account, the money cannot be borrowed against.
2) A worker cannot reduce contributions to the Social Security account, nor move money from one investment to another. Thus, a worker is stuck in the sorry fund called “government borrowing and spending on other programs.” (Yes, folks, the trust fund is spent on other programs.)
3) If a worker retires at age 67 but dies at age 70, those years of benefits that he or she missed due to an early death do are not included in the worker's estate to be passed on to his or her children or grandchildren.
In essence, Social Security has nothing better to offer, and far much worse to offer, than private accounts. Even for lower income individuals, Social Security has been touted as the best system for them since it replaces a larger percentage of their income than for higher-income individuals. All this means is that these workers are stuck in a low-return investment, with little disposable income to invest outside of it. And as younger workers of all income levels age, their
rate of return on Social Security will be much lower than that of today's retirees. (See the NCPA study on this).
The reason left-of-center policy wonks (and many politicians) don’t favor private accounts is because: 1) Private ownership does not allow for redistribution to favored constituents. 2) Politicians cannot take credit for providing financial security during seniors’ golden years. 3) Seniors are not as easily scared into voting for left-of-center politicians when rhetoric about losing their retirement security cannot be thrown about.
So, what you’re saying is that I’m paying money into a system for someone else to invest and/or spend on other people, without interest for me, and maybe, just maybe, I’ll get to see my principal returned…but maybe not?
Good point, Pam, that even though the Social Security benefit structure is somewhat progressive, in its effects it is regressive, when it comes to the opportunity to save additional dollars for retirement.
Indeed private accounts for Retirement, Health and Education are a far better answer than any devised by our government. These accounts can be pretax dollars and can be passed on to future generations with taxation. So even those of modest means can pass on a legacy someday to future generations.
If we can couple this with a flat tax with no deductions we can go far in transforming our economy into a stable bedrock of economic activity. In addition perhaps we should start this program with 18 year olds and see how well they do. It might not solve our immediate problems but if the longterm problems are fixed more people will be willing to sacrifice today.
Private accounts??? You folks sound like you are some sort of free market capitalists!! Come on now, we all know how well Marxist-socialism has worked! Not like there are tens of trillions in unfunded mandates in medicare and social security! Not like our OWN government has been taking money from those who don’t know any better and promising them payouts in our future! It is not as if our OWN government has been engaged in coercion and deception of the taxpayers and citizens. Can’t wait to tell my grandchildren that our country was actually a great place at one point.