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There have been many good, if ultimately unconvincing, arguments against allowing younger workers to privately invest a portion of their Social Security taxes through personal accounts. There have been even more silly ones. One of the silliest is the one regurgitated yesterday by ThinkProgress, that this week’s stock market decline proves that “If Social Security Had Been In Private Accounts The Stock Market Drop Could Have Been A Disaster.”
Few personal account plans would require a retiree to cash out their entire account on the day that the market crashed. But what if they did? It is important to understand that someone retiring yesterday would have begun paying into their account 40 years ago when the Dow was at 835.34. After yesterday’s decline, it opened at 15,676 today. Over those 40 years, the worker would have made roughly 1,040 contributions to their account. Only 48 of them would have been at a time when the market was higher than yesterday’s close.
Yep, even after yesterday’s crash, the worker would have made a tidy profit. In fact, his return would have been substantially higher than what he could expect to receive from Social Security.
The last that defenders of the status quo made this argument was 2009, during the market crash that led into the Great Recession. At that time the market hit a low of 6,547. Obviously, if workers had been allowed to start investing then, they would have done pretty well. But more importantly, retirees in 2008 would have done well too, once again better than Social Security.
Cato published this comprehensive study of that downturn and its impact on personal accounts: http://www.cato.org/publications/policy-analysis/still-better-deal-private-investment-vs-social-security
Social Security is running nearly $26 trillion in future unfunded liabilities. It cannot pay promised future benefits to young workers without substantial tax hikes. We should begin a discussion of how to reform this troubled program. A start to such a discussion would be to retire the canard about market crashes and personal accounts.
Crossposted to Cato@Liberty
For the historians among you, this week marks the 75th anniversary of the delivery of the first Social Security check. The program became law in 1935, began collecting taxes in 1937, and started delivering benefits in 1940. The recipient of that first Social Security check was Ida Mae Fuller of Ludlow, Vermont. Social Security turned out to be a very good deal for Ida Mae. Social security taxes were very low (a maximum of $60 per year) and she only worked for 3 years after the payroll tax began. She ended up paying just $24.75 in taxes. Even better, she lived to be 100, ultimately collecting $22,888 in benefits. That’s a heck of a return!
Unfortunately, the program will not be such a good deal for today’s young workers, who will be lucky to get back what they pay in, let alone a big return. Certainly, they will get back far less than they could earn from investing that money privately.
Moreover, Social Security, and its $24.9 trillion in unfunded liabilities, is, along with Medicare, one of the biggest drivers of our future debt. Young people will be paying that off too. Let’s put it bluntly, unless Congress does something to fix Social Security (and Medicare), young people are screwed.
To celebrate this unhappy anniversary, I published two columns this week. The first for Vice News:
and the other for Reason.com