A common claim of advocates of Social Security privatization is that private accounts deliver much higher rates of return for participants. The Cato Institute, for example, in its Cato Handbook for Policymakers tells us that:
�Social Security taxes are already so high, relative to benefits, that Social Security has quite simply become a bad deal for younger workers, providing a low, below-market rate of return. This poor rate of return means that many young workers� retirement benefits are far lower than if they had been able to invest those funds privately. However, a system of individual accounts, based on private capital investment, would provide most workers with significantly higher returns. Those higher returns would translate into higher retirement benefits, leading to a more secure retirement for millions of seniors.�
But is that true? To test the claim I compared my Social Security statement with my TIAA-CREF statement for a 401(a) plan which is essentially the same as a 401(k). Both list the total contributions made by the employers and myself. The Social Security statement indicates my benefit at 66, the age of my full retirement. My TIAA-CREF statement has the total accumulation. Since I am nearly 66 I can know much an annuity income it is worth.
My first year Social Security benefit was 12.61 percent of my total contributions. The first year TIAA annuity was 12.06 of total contributions�lower not higher than the return on my Social Security contributions as the Cato Institute so confidently claims.
It is important to point out so that as a professional employee, I am in a relatively high income category with a Social Security rate of return that is less than that of lower-income participants. For them, the rate of return for Social Security compared to private accounts would be much higher than mine, making it an even better deal.
Like the optimistic projections of the financial services industry whose interests it serves, the Cato Institute�s claim is based on before-the-fact overly optimistic assumptions of future market returns. My comparison was based on after-the-fact actual experience.
Addendum: from a reader of Social Insecurity: 401(k)s and the Retirement Crisis who ran his own numbers:
–James W. Russell