NCPA - National Center for Policy Analysis

How Personal Retirement Accounts Can Pay More Than Social Security

May 18, 2001

Reformers want to utilize the Social Security surpluses projected to accumulate between now and 2015 by allowing workers to invest 2 percentage points of their payroll taxes in personal retirement accounts (PRAs). The PRA balances, with their accumulated interest and dividends, would replace an increasing portion of retirees' Social Security benefits and reduce the government's obligation to pay retirement benefits.

Workers would come out ahead because private equities markets consistently provide a higher return on contributed dollars than Social Security:

  • According to the U.S. General Accounting Office, inflation-adjusted annual returns on stocks in the Standard & Poor's composite index have averaged 7 percent to 8 percent per year, despite the Great Depression, World War II and the stock market crash of 1987.
  • By contrast, Social Security's expected rate of return on payroll taxes contributed is a meager 2 percent or less for baby boomers, less than 1 percent for Generation Xers and close to zero for today's newborns.

What would happen to people who retire in the year of a stock market crash? In a Cato Institute study, Bill Shipman of State Street Global Advisors calculated how workers born between 1930 and 1976 would fare if they invested all of their Social Security payroll taxes in the U.S. stock market and purchased a retirement annuity with whatever is available at age 65. He determined that even if just before their retirement the market were to fall as dramatically as its worst day, month or quarter in history, in every case but one workers of all income levels and dates of birth would receive substantially higher retirement benefits than are promised by Social Security.

Source: Matt Moore (policy analyst, NCPA), "Questions and Answers About Personal Social Security Retirement Accounts," Brief Analysis No. 362, May 18, 2001, National Center for Policy Analysis.

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