NCPA - National Center for Policy Analysis

A "WHAT IF...?" SCENARIO FOR PERSONAL RETIREMENT ACCOUNTS

July 6, 2005

If former president Lyndon Johnson had created an ownership society using personal retirement accounts instead of implementing the current Great Society programs, today's retirees would be in much better financial shape, says Kirk Johnson of the Heritage Foundation.

Johnson and his colleagues analyzed the outcomes if three people of different income levels born in 1940 had begun investing in personal retirement accounts from 1965 to 2004. The results:

  • A worker earning $15,000 a year and setting aside 6 percent of his earnings would have $111,000 paid out at $640 a month, plus a Social Security benefit of $419 per month -- 26 percent more than in the current system.
  • A worker earning $35,000 a year and setting aside 5 percent of his earnings would accumulate $215,000 paid out at $1,244 a month, plus a Social Security benefit of $734 a month -- 35 percent more than in the current system.
  • A worker earning $65,000 per year and setting aside just 2.5 percent of his earning would have more than $280,000 at retirement, paid out at $1,618 a month, plus a Social Security benefit of $955 -- 35 percent more than in the current system.

Under this scenario, all three workers would receive less in Social Security benefits than in the current system, but the personal retirement accounts more than compensate for the difference in reduced benefits, leaving workers of all three income levels better off.

Critics who call President Bush's plan for personal accounts a "risky scheme" should realize that it's not so risky after all, says Johnson.

Source: Kirk Johnson, "PRAs: What If?" Heritage Foundation, April 12, 2005.

 

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