Comments by Michael Tanner on Rates of Return

February 20, 1999

In an opinion piece published in The Wall Street Journal on Thursday, February 18, Deputy Treasury Secretary Lawrence Summers and CEA Chairwoman Janet Yellen claim that workers would receive a higher rate of return from government investment in equities than they would in individually-owned accounts. Here's the analysis of the director of the Cato Project on Social Security Privatization, Michael Tanner:

"The assertion by Summers and Yellen that the President's plan would provide a higher rate of return to individuals than would privately invested accounts is bewildering: The President's plan aims at nothing more than preserving current Social Security benefits. That level of benefits represents a rate of return of less than 1% for most young workers. Indeed, many young workers will receive a negative return even if all currently legislated benefits are paid.

"In contrast, a fully privatized system would yield benefits for individuals three to five times higher than Social Security's currently legislated benefits. Consider a two-earner couple with a combined income of $54,000. If they were able to invest their payroll taxes in a mix of stocks and bonds that earned a rate of return of only 5 percent, they would accumulate nearly $1 million by retirement. That fund could finance an annuity paying them almost $90,000 per year, or well over three times what Social Security would pay under the President's proposal.

"Any attempt at propping up the pay-as-you-go system to approximate what Social Security has promised cannot possibly match the benefits individuals would receive from contributing their full payroll tax to individually owned, privately invested accounts."

2001 Index | 2000 Index | 1999 Index | 1998 Index