Social Security Reform: How Much of a Role Could Personal Retirement Accounts Play? Page: 2 of 18
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Social Security Reform: How Much of a Role Could
Personal Retirement Accounts Play?
Numerous proposals have called for creation of personal retirement accounts to
replace or supplement the benefits of future Social Security recipients. Some are
based on the belief that a better way to provide retirement income would be to have
workers accumulate assets directly. Others are designed to offset Social Security
benefit cuts that might be made to restore the system to sound financial footing.
Much of the debate is fueled by the perception that, per dollar of contributions,
personal accounts invested in the private sector would exceed the value of future
Social Security benefits, particularly since those benefits will likely need to be
curtailed as Social Security's future costs rise.
Opponents argue that personal accounts will place many individuals at risk
because they might make unwise investment decisions, the timing of their
acquisitions and liquidations may be unfortunate, or they may spend what they
otherwise should save. They also contend that the rates of return on stocks are likely
to be lower in the future to compensate for the runup in the stock market over the
past two decades that were characterized by price/earnings ratios that were far higher
than their historical average.
Given these contrasting assertions, there is considerable confusion over how to
evaluate the possible role of personal accounts in reforming Social Security. A
critical part of the debate is how much a personal account could provide relative to
future Social Security benefits. This report provides illustrations by projecting
potential personal account assets at the time of retirement and comparing them to
projected lifetime Social Security benefits under current law.
Because any investment benefits from compound growth over many years, the
illustrations show that even under the more optimistic of the two investment
scenarios (a 10% annual return), older workers (i.e., the baby boom) would not have
enough time to build large accounts relative to their Social Security benefits. For
workers who retire at age 62 in 2010, those with average earnings who set aside 2%
of pay beginning in 2003 would have an account equal to only 3% of their benefits.
Age-62 workers retiring in 2020 would have built only modest accounts, equaling
13% of their benefits. Thus, the more rapid the phase-in to a constrained or
alternative Social Security system, the more difficult it would be for many baby
boomers to make up for foregone Social Security benefits.
The accounts become more significant the longer the period of time in which
to grow. For workers retiring at age 62 in 2030, a 2% of pay contribution rate
earning 10% could reach a level equal to 29% of an average-wage earner's Social
Security benefits. With a return matching the government bond rate (assumed to be
6.09% annually), a 2% contribution rate could grow to a level equal to 16% of
benefits. For aged 62 workers retiring in 2050, having 41 years to invest, the
accounts would become substantial. A 2% contribution rate growing at 6.09% would
reach a level equal to 24% of Social Security benefits; a 10% annual return would
produce an account equal to 55% of Social Security benefits.
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Social Security Reform: How Much of a Role Could Personal Retirement Accounts Play?, report, May 15, 2002; Washington D.C.. (digital.library.unt.edu/ark:/67531/metadc808488/m1/2/?rotate=270: accessed January 18, 2019), University of North Texas Libraries, Digital Library, digital.library.unt.edu; crediting UNT Libraries Government Documents Department.