Private Social Security Accounts
May 3, 2011
Although many American retirees now enjoy a comfortable lifestyle financed by a combination of Social Security, private pensions and personal savings, many other retirees are far from financially secure. Someone who retires now after earning average wages all his life will receive Social Security benefits of less than $20,000 annually -- not enough to maintain the middle class standard of living that he had during his working years, says Martin Feldstein, a professor at Harvard University.
Social Security must be reformed in a way that protects overall retirement incomes by creating universal supplemental personal retirement accounts that generate an annuity for retirees.
Here's how such a system might work.
- Each individual would designate a broad-based mutual fund from a large list of funds approved by the government.
- The designation could be done on the individual's annual tax return and could be changed once a year.
- Employers and the self-employed would send an additional few percent of wages to the Social Security Administration each month in addition to the current payroll tax.
- The Social Security Administration would then forward those dollars to the mutual fund chosen by the individual.
- The returns on those funds would be untaxed just as they are in an IRA or 401(k).
- With a 3 percent payroll deduction, someone with $50,000 of real annual earnings during his working years could accumulate enough to fund an annual payout of about $22,000 after age 67, essentially doubling the current Social Security benefit.
- That assumes a real rate of return of 5.5 percent, less than the historic average return on a balanced portfolio of stock and bond mutual funds.
Source: Martin Feldstein, "Private Accounts Can Save Social Security," Wall Street Journal, May 2, 2011.
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