NCPA - National Center for Policy Analysis

Social Security Privatization Would Ride Out Market Dips

May 15, 2000

Should a volatile stock market throw cold water on the idea of letting people put part of their Social Security payroll tax into personal retirement accounts? Proponents of partial privatization say no. Investing in a personal retirement account is different from day trading or market speculation. And while putting part of your retirement money in a private account does take it out of the hands of politicians, there are still restrictions.

  • You must choose one of several private fund management companies to invest and manage your account.
  • The fund management company's control also is restricted by a requirement that your money be invested conservatively, probably in the equivalent of a stock index fund.
  • While the account will fluctuate from day to day, it will gradually increase in value because of the market history of average annual real growth and the power of compounding.

Social Security benefits are based on your best 35 years of earnings. Texas A&M University researchers have calculated that the worst average return on a stock index portfolio over any 35 year period from 1940-1975 to 1963-1998 would have been 4.2 percent per year after adjusting for inflation. Add the effect of interest compounding, and the account would grow faster.

Privatization offers the opportunity to avoid Social Security's inevitable demographic doom, proponents say. By about 2015, the payroll tax won't take in enough to pay benefits. The only way the government can keep up payments is by raising taxes or cutting the benefits themselves. Social Security has a huge unfunded liability in the form of benefits already promised but not yet paid, and it will only grow larger if nothing is done to start funding all or part of retirees' benefits in advance of their retirement. That is the idea behind personal investment accounts.

Source: Pete du Pont (NCPA), "Market Still Best Bet For Retirement," Dallas Morning News, May 15, 2000.

 

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