Still a Better Deal: Private Investment vs. Social Security

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Opponents of allowing younger workers toprivately invest a portion of their Social Securitytaxes through personal accounts have longpointed to the supposed riskiness of private investment.The volatility of private capital marketsover the past several years, and especially recentdeclines in the stock market, have seemedto bolster their argument.

However, private capital investment remainsremarkably safe over the long term. Despite recentdeclines in the stock market, a worker whohad invested privately over the past 40 yearswould have still earned an average yearly returnof 6.85 percent investing in the S&P 500, 3.46percent from corporate bonds, and 2.44 percentfrom government bonds.

If workers who retired in 2011 had been allowedto invest the employee half of the SocialSecurity payroll tax over their working lifetime,they would retire with more income than if theyrelied on Social Security. Indeed, even in theworst-case scenario—a low-wage worker whoinvested entirely in bonds—the benefits fromprivate investment would equal those from traditionalSocial Security.

While there are limits and caveats to thistype of analysis, it clearly shows that the argumentthat private investment is too risky comparedwith Social Security does not hold up.With Social Security already running a cashflowdeficit today—and facing a $21 trillionshortfall in the future that will make it impossibleto pay promised benefits—private investmentand personal accounts should be part ofany discussion about reforming the troubledsystem.