NCPA - National Center for Policy Analysis

PERSONAL RETIREMENT ACCOUNTS WORK BETTER THAN STATUS QUO

June 13, 2005

Under a system of personal retirement accounts, households would fare much better than under the current pay-as-you-go Social Security system, according to a study from the University of Toronto and the University of Southern California.

Authors Luisa Fuster, Ayse Imrohoroglu and Selagattin Imrohoroglu modeled the expected benefits of a partially privatized system to the current pay-as-you-go system. They found:

  • The expected return on personal retirement accounts at birth ranges from 5.10 percent to 5.41 percent, based on life expectancy.
  • However, when personal accounts are combined with mandatory annuity payouts upon retirement, the expected return is even higher, from 5.49 percent to 5.51 percent based on life expectancy.
  • Compare these returns with the expected return on the current pay-as-you-go system of only 2.7 percent to 2.9 percent, based on life expectancy.

The personal retirement account benefits would be financed by a five percent payroll tax contribution. Any benefits accrued benefits would be passed on to an individual's estate if he or she died before retirement age. If the payout is annuitized, individuals would receive payouts proportional to the wealth accumulated in a personal retirement account, say the authors.

Source: Selahattin Imrohoroglu, et al., "Personal Security Accounts and Mandatory Annuitization in a Dynastic Framework," (February 2005), CESifo Working Paper Series, No. 1405.

 

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