New Cato Study: Despite Lagging Market, Personal Accounts Still Better than Social Security
September 23, 2002
Although some polls indicate that fear of market risk is the greatest reason for
individuals to reject personal accounts as an alternative investment for Social Security
payroll taxes, a new Cato Institute study demonstrates that much of that fear is
unfounded, and despite the current bear market, in the long term, workers would get a
greater return with stocks and bonds.
In “Personal Accounts in a Down Market: How Recent Stock Market Declines
Affect the Social Security Reform Debate,” Social Security Analyst Andrew Biggs argues
that opponents of personal accounts have focused on short-term market performance
when what matters is market performance over a matter of decades.
“On average, a personal account invested only in stocks would produce benefits
two and one-half times higher than had those same funds been devoted to the
traditional pay-as-you-go program,” writes Biggs. “From the late 1970s onward, no
individual—including individuals retiring today—would have been worse off with a
personal account than by remaining in the current system.”
Although some members of Congress have attacked the recommendations of the
President’s Commission to Strengthen Social Security, a Cato Institute study last month
found that the commission’s three reform proposals based on personal retirement
accounts are viable ideas that should be followed-up to ensure the solvency of a program
that will go broke unless changes are made.
The benefits of personal accounts apply to older, as well as younger workers. A
worker retiring today would increase his retirement income by having a personal
account. A down market, therefore, doesn’t conflict with the case for personal accounts,
but rather strengthens it.
Public support for personal accounts remains strong--even after two years of
weak market performance--as confirmed by a Institute/Zogby International poll
conducted in July.
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