NCPA - National Center for Policy Analysis

Research Demonstrates Individual Retirement Accounts Would Benefit the Poor

November 6, 2001

Economist Jagadeesh J. Gokhale of the Federal Reserve Bank of Cleveland has conducted research that reveals how much better off low-income people would be if private retirement accounts were introduced.

Noting that many poor people don't save for retirement because so much of their pay goes toward Social Security taxes, he set up two computer simulations -- one of the U.S. economy under Social Security and one without it.

Here's what he found, based on constant 1995 dollars:

  • Under the current system, a child who grows up in a family with few financial assets -- defined as having less than $99,000 in cash, life insurance and stocks -- has a 40 percent likelihood of retiring with little in the way of assets.
  • But if Social Security were replaced by individual accounts, the person's probability of retiring with less than $99,000 in assets would fall to 16 percent.
  • The likelihood of retiring with $245,000 to $455,000 in assets would nearly triple, to 28 percent.
  • And the chance of amassing more than $455,000 would more than double, to more than 11 percent.

People who grew up in the top rung ($455,000 in family assets) have a 74 percent chance of retiring with at least that much money under a system of individual accounts -- compared with only a 46 percent chance under the status quo.

Source: James Mehring and Peter Coy, "Economic Trends: Huh? Tinker with Social Security?" Business Week, November 5, 2001.

 

Browse more articles on Tax and Spending Issues