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savings rate during one's working years and the

Figure 8

return on those savings. In estimating these ben-

OASI Tax Flows as a Percentage of U.S. Market Capitalization

efits, we have assumed the savings rate to be the

same as the combined employer and employee

4.50%

OASI tax rates listed in the 1997 Trustees

Report. Simulated returns are from a stock port-

4.00%

folio and a balanced fund, both of which have

3.50%

been described.

As it turns out, the market-based system pays

3.00%

higher benefits to all workers irrespective of

income, date of birth, chosen portfolio, or

2.50%

received subsidy. And low-wage workers' bene-

fits average more than 100 percent higher than

2.00%

those from Social Security--without redistribu-

1.50%

tion from high-wage workers. Both average and

high-income workers do better as well. (See

1.00%

Appendix B.)

Our analysis suggests little to support the

0.50%

assertion that only high-income workers would

choose a private alternative; workers of all

0.00%

income levels most likely would. It is important

to note, however, that different savings rates or

Year

investment returns could materially change this

conclusion. Yet, even at a 7 percent savings rate,

benefits from investing in the stock market are

Objection #6: Only

significantly greater than Social Security's

the wealthy or the financially

OASI benefits.30

Even though one would expect to receive

astute would choose the

higher benefits from markets, it is unknowable

market-based system.

how many would choose to leave the current

Some argue that a market-based system

system. Whether because of inertia, being close

would appeal only to the wealthy, leaving the

to retirement, or for other reasons, some would

financially less-well-off to fend for themselves

stay. It is important that these individuals not be

in a system ultimately destined to unravel.

disenfranchised. They must receive the benefits

Because of the redistributive nature of the cur-

they rightly have come to expect. The system

rent Social Security benefit formula, the argu-

Moving to a

will not unravel because too few or too many

ment goes, high-income workers receive lower

prefer the current system. Its future is ultimately

privatized

benefits per tax dollar paid than do low-income

dependent on whether benefits received are rea-

Social

workers. Therefore, if high-income workers

sonable relative to taxes paid. On this score,

were allowed out of Social Security, the subsidy

Security

Social Security's future is precarious.

they are required to pay would end, leaving

system is not

them better off at least by that amount. Lower

Objection #7:

risk-free. But

income workers, on the other hand, would want

A market-based system would

to stay in Social Security because the subsidy

the current

necessitate high administrative

they receive leaves them better off.

Social

The argument is logical but incomplete. The

costs, reducing returns to

Security

relevant tradeoff is whether one is better off in

unacceptable levels.

Social Security, inclusive of subsidies paid or

system is also

received, than in a market-based system without

One of the most frequently repeated objec-

not risk-free.

them. All workers, irrespective of income, will

tions to privatizing Social Security is that a mar-

most likely choose the system that affords them

ket-based retirement system would have

the higher risk-adjusted benefits.

extremely high administrative costs. This is an

Unlike the pay-as-you-go structure where

important issue because even a small cost

retirees' benefits are paid by workers' taxes,

incurred annually can make a meaningful differ-

market-based benefits are determined by the

ence in accumulated wealth. For example, annu-

12