March 26, 2009

AND PASSING PRIVITIZATION NOW WOULD GOOSE THE HECK OUT OF THE MARKETS:

Retirement Math: How would personal Social Security accounts fare in the current market? (Andrew G. Biggs, 03.25.09, Forbes Magazine)

Obama's question deserves an answer. How would personal Social Security accounts have fared in the current market? Surprisingly, careful analysis shows that even individuals retiring today would have increased their total Social Security benefits by holding a personal account. Here's why.

First consider a plan in which workers could voluntarily invest four percentage points of the 12.4% Social Security payroll tax in a personal account. The account would follow a "life-cycle portfolio," shifting from 85% stocks through age 29 to 15% stocks by age 55. At retirement the account balance would be converted to a monthly annuity.

However, workers who chose personal accounts would also receive reduced traditional Social Security benefits. Those would be cut by the amount the individual contributed to the account, plus interest at the government bond interest rate. This benefit offset would compensate Social Security for the reduced taxes paid by account holders. Total Social Security benefits would increase if personal accounts returned more than the interest rate on government bonds.

To answer Obama, I simulated individuals who held accounts their entire lives and retired this year at age 65. A typical retiree would be entitled to a traditional Social Security benefit of $15,700 per year. For workers who chose personal accounts, this traditional benefit would be reduced by $7,800. However, the worker's personal account balance of $161,500 would pay an annual annuity benefit of $10,100. That's a $2,300, or 15%, net increase in Social Security benefits.

But we can go further. Using stock and bond data since 1871, I simulated 94 additional cohorts of account holders, retiring from 1915 through 2007. By holding personal accounts every single group of retirees would have increased their benefits, by between 6% and 23%, with an average increase of 15%.

Posted by Orrin Judd at March 26, 2009 9:23 AM
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