Would a Privatized Social Security System Really Pay a Higher Rate of Return

John D Geanakoplos · Olivia S. Mitchell · Stephen P. Zeldes

100 citations0/0 files storedNational Bureau of Economic Research

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Financial Literacy, Pension, Retirement Analysis Retirement, Disability, and Employment Economic Policies and Impacts

Abstract

As the U.S. Social Security system has matured, the rate of return received by participants has fallen.In the coming years, around the time the Baby Boom generation retires, the system will experience a budget shortfall.Tax revenues will fall short of promised benefits, requiring outlays from the interest earnings, and then the principal, of the trust fund.Eventually, the trust fund will be depleted.This projected insolvency will necessitate benefit cuts and/or tax increases, leading to further declines in the rates of return individuals can expect.Many advocates of reform suggest that an answer to this problem is to privatize Social Security.They argue that the creation of individual accounts invested in private capital markets, and especially in the stock market, will produce better rates of return for individuals than will Social Security.For example, Stephen Moore of the Cato Institute recently claimed that "privatization offers a much higher financial rate of return to young workers than the current system... if Congress were to allow a 25 year old working woman today to invest her payroll tax contributions in private capital markets, her retirement benefit would be two to five times higher than what Social Security is offering".1 Presidential candidate Steve Forbes criticized Social Security because "the average worker retiring today receives a lifetime return of only about 2.2 percent on the taxes he has paid into the system.Contrast this with the historic 9 -10 percent annual returns from stock market investments...The advantages of an IRA-type approach are overpowering."2 Our goal in this paper is to challenge the following popular argument: a) 3 While we focus on the rate of return concept of money's worth in this paper, additional measures are evaluated in more detail in our longer study (Geanakoplos, Mitchell, and Zeldes, forthcoming).

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References

2000How Do Household Portfolio Shares Vary with Age 1994Generational Accounting: A Meaningful Way to Evaluate Fiscal Policy 1993Stocks, bonds, bills, and inflation yearbook 1997Family Finance in the U.S.: Recent Evidence from the Survey of Consumer Finances 1996"Social Security Privatization: A Structure for Analysis"

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