In 2005, Congress debated giving U.S. workers private savings accounts to invest their Social Security contributions in the stock and bond markets. Sixteen years later, we review how that would have worked out for workers.
Topics covered include:
- How the public and private sectors are both critical for a functioning social security systems
- Which countries pay the highest social security benefits
- How have other privatized social security plans worked out around the world
- How workers prefer defined contribution plans even though they are worse off than if defined benefit plans were still widely available
- How worried should we be about aging populations and rising dependency ratios
- Why Social Security won’t go away
Show Notes
Social Security Quick Calculator—Social Security Administration
The average 401(k) balance by age by Pau Deer—Empower
CBO’s 2022 Long-Term Projections for Social Security—Congressional Budget Office
Policy Basics: Top Ten Facts about Social Security—Center On Budget and Policy Priorities
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Transcript
Welcome to Money for the Rest of Us. This is a personal finance show on money, how it works, how to invest it, and how to live without worrying about it. I’m your host, David Stein. Today is episode 441. It’s titled, “What if Social Security Had Been Privatized?”
Personal Savings Accounts
In 2005 Congressional Representative Paul Ryan and Senator John Sununu proposed a plan to reform Social Security. The act was the Social Security Personal Savings Guarantee and Prosperity Act. Under their plan, it would establish voluntary individual accounts for workers who were under the age of 55, beginning on January 1sr 2006.
These personal savings accounts would allow the workers to allocate a portion of their Social Security taxes to an investment account. It would be controlled by a central administrative authority, but the workers would be able to choose various investment options with the default option being 65% in a broad US equity index fund and 35% in a broad corporate bond index fund.
All participating workers in these personal savings accounts would be guaranteed that their total benefits for Social Security would at least be as good as what was already in place. And if their investment accounts did better than that, then they would get more than that. In other words, there was a floor, a guarantee. Sign me up for that, if I can keep all the upside, and have none of the downside. I do it.
Interestingly, those who chose not to participate in the personal savings accounts would not be guaranteed their benefits at the levels that was there in 2006.
In other words, if Congress cut benefits if you weren’t participating in the personal savings accounts, then there is the risk of your benefit being cut. The program also required that when it came time to take Social Security, that the balance in the personal savings account would be annuitized so that the annuity payments would equal at least what would have been gotten under Social Security.
Keep in mind, Social Security benefits are indexed to inflation. And so the annuity, the annuitization would need to be an annuity that would increase as the cost of living increased.
Real Resources Back Cash
In 2005 Federal Reserve Chair Alan Greenspan was testifying in front of Congress, and Representative Ryan asked him a question in regard to these personal savings accounts and the reform of Social Security.
Ryan asked Greenspan, “Do you believe that personal retirement accounts can help us achieve solvency for the Social Security system, and make those future retirement benefits more secure?”
Greenspan replied, “Well, I wouldn’t say the Pay As You Go benefits are insecure, in the sense that there’s nothing to prevent the federal government from creating as much money as it wants, and paying it to somebody.”
In other words, the Social Security system in his mind wasn’t insecure, because the money could always be printed to pay the benefits. But he didn’t stop there, fortunately. He continued, “The question is, how do you set up a system which assures that real assets are created, which those benefits are employed to purchase? So it’s not a question of security, it’s a question of the structure of a financial system, which assures that the real resources are created for retirement as distinct from the cash. The cash itself is nice to have, but it’s got to be in the context of the real resources being created at the time, those benefits are paid, so that you can purchase real resources with the benefits.”
What he’s referring to is the need for a dynamic economy, comprised of workers and businesses that produce goods and services, those real resources that retirees can purchase.
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