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These results are consistent with other studies

Table 2

showing higher retirement benefits from mar-

Comparison of Initial Monthly Social Security Benefit to Initial

kets than from pay-as-you-go financing.11

Monthly Capital Markets Benefit for Low-income Workers

But arguments frequently are made that

Year of

Social Security

Equity Portfolio

Bond Portfolio

future market returns may be lower than past

Birth

Benefit

Benefit

Benefit

experience. And portfolios will have a mixture

1930

$581

$ 980

$ 469

of stocks and bonds, so a stock-only generated

1950

$668

$2987

$1076

benefit, although accurate, is exaggerated. And

1970

$799

$2744

$1123

there are administrative costs that would reduce

returns, perhaps significantly.

Note: Constant 1997 dollars. Worker is assumed to retire at the normal retirement age (NRA). Equity

portfolio is 90 percent large capitalization stocks and 10 percent small capitalization stocks. Bond

In adjusting for these points more conserva-

portfolio is 50 percent government bonds and 50 percent corporate bonds. Calculations are based on

tive assumptions were made. Savings are invest-

figures in Social Security Administration, Social Security Bulletin, Annual Statistical Supplement

ed in a portfolio of 60 percent stocks and 40 per-

1997 (Washington: Government Printing Office, 1997); Stocks, Bonds, Bills and Inflation (Chicago:

cent bonds--commonly referred to as a bal-

Ibbotson Associates, 1997).

anced fund--each asset as specified above. The

balanced fund's annual returns are those actual-

ly achieved from 1951 through 1996, averaging

9.92 percent. Starting in 1997, the assumed

Table 3

annual return is 8.8 percent.12 Administrative

costs are 1 percent, reducing the after-cost nom-

Comparison of Initial Monthly Social Security Benefit to Initial

inal annual return to only 7.8 percent.

Monthly Balanced Fund Benefit Net of Administrative Costs for

(Administrative cost assumptions are developed

Low-Income Workers

further in responding to Objection #7.)

Year of Birth

Social Security Benefit

Balanced Fund Benefit

Table 3 compares benefits received from

1930

$581

$ 605

Social Security to these more conservative port-

1950

$668

$1514

folios. In each of the three cases the market

1970

$799

$1431

affords low-income workers higher retirement

Note: Constant 1997 dollars. Worker is assumed to retire at the normal retirement age (NRA).

benefits than does Social Security, on average

Administrative costs are assumed to be 100 basis points (1 percent of return) per year. Portfolio is

70 percent higher. Appendix B shows these

60 percent equities and 40 percent bonds as described on page 5. Calculations are based on figures

results for low-, average-, high-, and maximum-

in Social Security Administration, 1997 Trustees Report (Washington: Government Printing Office,

wage workers born each year from 1930

1997); Stocks, Bonds, Bills and Inflation (Chicago: Ibbotson Associates, 1997). During the accumu-

through 1976.

lation phase administrative costs are 1 percent. During retirement benefits are paid from a fund that

earns 6.5 percent net of costs.

The benefit increase for low-income workers

is achieved without redistribution from high-

income workers. However, if redistribution per

returns of these stock and bond portfolios from

se is a social objective, then a market-based

1951 (the year one born in 1930 is assumed to

system with redistribution will provide higher

start working) through 1996 were 12.6 percent

benefits to low-income workers than will a pay-

and 5.9 percent, respectively. Future annual

as-you-go system with redistribution.

returns are assumed to be 10 percent for stocks

Low-income workers are some of society's

and 7 percent for bonds. The rate for bonds

neediest. Their pre-tax income of $13,366

reflects the approximate long-term interest rate

makes it difficult to make ends meet. Some live

that is presently available for the next 30 years.

close to the margin of subsistence. A small dif-

During retirement the nominal annual return

ference in income, even $50 a month, can make

and inflation are assumed to be 6.5 percent and

a meaningful impact on their lives. Yet, through

3.5 percent, respectively. Table 2 shows Social

Old-Age and Survivors Insurance (OASI), 10.7

Security versus market benefits using the above

percent (inclusive of the employer's portion) of

assumptions.

their wages are taxed away and earn them a

In all cases but one, low-income workers

below-market return. With little or nothing left

earned greater retirement benefits from bonds

over after Social Security taxes--plus spending

and stocks than they did from Social Security.

for food, shelter, and clothing--they effectively

On average, the stock market provided more

are precluded from investing in the capital mar-

than a 100 percent increase in low-income

kets for a more comfortable retirement. Whether

workers' standard of living during retirement.

from the point of view of economics, finance, or

4