Early last year, the Center for Freedom and Prosperity released this video, narrated by yours truly, making the case that the United States and other nations should shift from a tax-and-transfer entitlement scheme to a system of personal retirement accounts.
Some left wingers criticized the idea, saying the big drop in the stock market in 2008-2009 is proof that personal retirement accounts are too risky.
You won’t be surprised to learn, though, that they are wrong. It is true that retirement income fluctuates with a system of personal accounts, but that simply means that it is difficult to predict how much more income one would enjoy when compared to being stuck with Social Security.
Here is the key section from a just-released paper authored by my Cato colleague, Mike Tanner.
Despite recent declines in the stock market, a worker who had invested privately over the past 40 years would have still earned an average yearly return of 6.85 percent investing in the S&P 500, 3.46 percent from corporate bonds, and 2.44 percent from government bonds. If workers who retired in 2011 had been allowed to invest the employee half of the Social Security payroll tax over their working lifetime, they would retire with more income than if they relied on Social Security. Indeed, even in the worst-case scenario—a low-wage worker who invested entirely in bonds—the benefits from private investment would equal those from traditional Social Security.
Some people doubtlessly will still be skeptical of personal accounts, thinking to themselves that a check from the government might be meager, but at least it’s guaranteed.
But that is a very foolish assumption. When the welfare state begins to collapse and it becomes apparent that higher taxes simply make a bad situation even worse, politicians will have no choice but to renege on unaffordable promises. Just look at what’s happening in Greece and elsewhere in Europe.
And as this chart from Mike’s paper illustrates, American politicians have dug a huge hole. Relying on the empty promises of Washington politicians will be far more risky than personal retirement accounts.
The chart shows big funding shortfalls, particularly once the baby boomers have retired. Most people, though, aren’t familiar with concepts such as “percent of taxable payroll.”
So let’s make it simple. If we look at all of the future deficits, adjust them for inflation so we can make an apples-to-apples comparison, and then add them up, the Social Security shortfall is close to $30 trillion.
We know that personal accounts work. Nations such as Australia, Chile, and Sweden have reaped big benefits by making the shift.
I’m not surprised that left-wing journalists want to trap American workers in a bad system. But I am disappointed that a lot of Republican politicians feel the same way.
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[…] Notwithstanding everything I just wrote, I actually agree with them that we should eliminate the Social Security payroll tax. But we should get rid of the tax as part of a transition to a system of personal retirement accounts. […]
[…] Notwithstanding everything I just wrote, I actually agree with them that we should eliminate the Social Security payroll tax. But we should get rid of the tax as part of a transition to a system of personal retirement accounts. […]
[…] Notwithstanding everything I just wrote, I actually agree with them that we should eliminate the Social Security payroll tax. But we should get rid of the tax as part of a transition to a system of personal retirement accounts. […]
[…] other crisis is that the system gives workers a lousy level of retirement income compared to the amount of taxes they pay during their working years. Younger workers are […]
[…] other crisis is that the system gives workers a lousy level of retirement income compared to the amount of taxes they pay during their working years. Younger workers are […]
[…] other crisis is that the system gives workers a lousy level of retirement income compared to the amount of taxes they pay during their working years. Younger workers are […]
“I am pretty sure people believe what they advocate as solutions to societal problems are the right course of action.”
The numbers which are presented in this article are clear, and they are nothing new. There has never been any doubt that retirees would be better off if they were able to privately invest what is taken from them for Social Security. Given that, how is it possible to say they believe that this is the best solution for retirement? Are you suggesting that they are too stupid to understand what the numbers indicate? If not, the only alternative is malice.
I would suggest that this program has been maintained for this long because it has been a source of revenue to spend on other vote purchasing projects for years, and it continues to be maintained today because no politician is going to admit that they have known for years that the system was ultimately doomed.
It’s kind of hard to take you seriously when you say things like:
“I’m not surprised that left-wing journalists want to trap American workers in a bad system.”
That suggests malice on their part. I am pretty sure people believe what they advocate as solutions to societal problems are the right course of action. To suggest otherwise poisons the discussion from the outset. I follow Cato on Twitter, read lots of articles on libertarianism, and am generally sympathetic to many of the positions. When I read things like this, I am reminded why libertarianism has always remained on the fringe of american politics.