Privatized Social Security: Still a Much Better Deal, Study Finds

Personal accounts would pay far better returns and benefits than the current system

December 1, 1999

The current Social Security system would not pay higher rates of returns and benefits than a privatized system of personal retirement accounts, according to a Cato Institute paper that refutes a recent study by the National Committee to Preserve Social Security and Medicare.

In "Social Security Is Still a Hopelessly Bad Deal for Today's Workers," Cato senior fellow Peter J. Ferrara refutes the committee's paper, by John Mueller, that attempts to show that the current system is better and should be preserved. The committee uses desperate measures to try to prove its point, despite the fact that President Clinton, the World Bank, Harvard professor Martin Feldstein, prominent think tanks and many nations have all come to the conclusion that personal retirement accounts will produce a higher rate of return on payroll taxes than the current system.

Ferrara examines the assumptions used by the committee and finds them "extreme and untenable." Among those assumptions:

• Stock market returns will be 77 percent less over the next 75 years than they have been over the last 75 years. Ferrara finds this hard to believe.
• Investors will get a negative real rate of return on corporate bonds over the next 75 years, down from the historic 3 to 4 percent real return. Ferrara disputes this.
• The rate of economic growth will decline by 50 percent over the next 75 years, which Ferrara finds unfathomable.
• Administrative costs that are two to five times more than what the costs would be for the start-up years and 25 to 50 times the costs in later years. These costs are exaggerated, according to Ferrara.

"If Mueller is right, then we should expect the imminent demise of the New York Stock Exchange, as stock investors could get better returns on federally guaranteed U.S. Treasury bonds," writes Ferrara. The committee's assumptions are "directly contrary to the judgment of millions of capital market investors who at this moment have produced the greatest bull market in world history."

Under the present system, workers have no property rights in their assets or benefits, which makes workers "totally dependent on the interplay of national politics for such benefits." Ferrara argues that the members of the committee can choose to stay in the Social Security system, with its poor rate of return and benefits, but should allow the millions of workers who do not agree with them to be free to make their own choices about their own money.

"Mueller's analysis only proves the opposite of his intended result. By showing what extreme and unrealistic assumptions are needed for Social Security to pay better benefits, he establishes once again that personal accounts would pay far better returns and benefits than Social Security," Ferrara writes.

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