Privatized Social Security as an investment

From Personal Finance

(This was originally posted on the Admistrative Wiki at www.wikia.com/wiki/Talk:Investments)

There is now enough known that there can be calm analysis of the proposed changes in Social Security. It takes a bit of math and a hand held calculator, but it becomes apparent that the proposed changes will benefit virtually every person in the country. The benefits may or may not be enough to prevent higher future taxes or benefit cuts, but they will go a long way.

Consider a 22 year old expecting to retire at 67. Look only at $1000 he elects to divert from Social Security into a private account. He may make many subsequent investments, but let us look at just that one year. Disregarding inflation which is a wash, the SS assumes a real two per cent rate of earnings on reserves. The $1,000 will grow to $2,437.85 at age 67 when he retires. In effect this will fund a specified annuity for his remaining life. Now, that $1000 taken away will leave SS short the larger amount. Horrors.

However, those electing private investment have to give up future distributions in the amount that would cost what the $1000 would have grown to at three percent return rate and not two percent. This is $3781.60. Thus SS will not have $2437.85 to pay benefits but will have the benefits requirement reduced by $3781.60. SS will have $1343.75 net additional funds available to increase the security of benefits to those who foolishly do not take advantage of the opportunity or who are too old to be allowed so to do Some other 22 year old will have funds made available to cover over 55 percent of his SS benefits, making payment thereof that much more certain.

Will the person electing a private account earn more or less than what SS will take away in benefits? The S&P 500 index was created in 1926. Between 1926 and 2004 there were 63 periods of 15 year length, starting with 1926-1941, then 1927-1942, continuing until 1989-2004. The period with the very worst average investment return was 1928-1943. It had an after inflation return of 3.71 percent. Note, this is over three percent. The best such period was over four times as profitable.

Those participating and those not participating all will benefit, but so will the nation and its economy. Money being invested provides the means of companies acquiring factories, machines, processes, and employees. Productive capacity will grow. Further, increased production will generate tax revenues to the government. This will allow tax reductions, or may be used for such things as covering the increasing medical costs that are a real threat for our future.