
Monthly Benefit Comparison of Returns from Social Security
and Capital Markets for a Low-Wage Worker
Source: William G. Shipman, "Retiring with Dignity: Social Security vs. Private Markets," Cato Institute Social Security Paper no. 2, August 14, 1995, p. 4.
Foxfyre's note: These figures may or may not contradict Parados's posted source:
Most financial planners suggest that if one's preretirement standard of living is to be maintained, retirement benefits of between 60 and 85 percent of preretirement income are probably necessary.10 Clearly, then, Social Security fails to provide sufficient income to afford poor workers a dignified and secure retirement.
Perhaps that is one reason why poverty rates remain higher for people over the age of 65 than for people aged 18 to 65. Although we have made extraordinary strides in reducing poverty among the elderly, in 1992, 12.9 percent of seniors were poor, compared to 11.7 percent of 18 to 65 year olds.
Consider the advantages that privatization of Social Security would bring to the elderly poor. In his 1995 study for the Cato Institute, financial analyst William Shipman of State Street Global Advisors compared the Social Security benefits that an individual is scheduled to receive under current law with the potential return that the individual would received if he or she had been allowed to invest an amount equivalent to the OASI portion of payroll taxes in either stocks or bonds.
Shipman found that the 25-year-old low-wage worker described above is scheduled to receive Social Security benefits of $769 (1995 dollars) per month upon retirement at age 67. However, if that young worker were allowed to invest his payroll taxes in bonds, he would be able to purchase an annuity upon retirement that would provide benefits of $1,085 per month, assuming that the average performance of the bond market over the next 40 years remains approximately the same as the average over the last 60 years. Again assuming historic rates of return, investing in stocks would provide that worker with benefits of $2,419 per month.
With those higher returns, the worker's retirement income would equal 92 percent of his preretirement income if he had invested in bonds and 188 percent of preretirement income if he had invested in stocks. Clearly, the higher rate of return would benefit the elderly poor, providing them with a higher postretirement standard of living.
Moreover, any discussion of scheduled benefit levels or projected replacement rates assumes that Social Security will be able to pay all the benefits promised. But only 70 percent of future benefits are fully funded.14 Thus, unless additional funding is found, benefits will have to be reduced and replacement rates will fall, perhaps by as much as 30 percent.
Entire article at:
http://www.cato.org/pubs/ssps/ssp4.html