Eric Olsen was nice enough to encourage me to post something here about a new study that I authored for the think-tank I work for, the Public Interest Institute, that examines Social Security reform. (And Eric is much too nice to for me to decline.) Entitled “Social Security Reform and Union Households in Iowa,” it takes on claims from union leaders that introducing a system of personal retirement accounts (PRAs) to Social Security will result in drastic benefit cuts. Needless to say, the union leaders’ dire predictions don’t hold water.
For the purposes of this post, I’ll simply reprint two parts of the study. The first describes the three reform plans I looked at:
The first plan is based on the “Retirement Security Act,” a new Social Security reform recently introduced by Representative Nick Smith. Referred to here as the “2.5% Plan,” it allows workers to invest two and one-half percent of their payroll annually in a PRA that can be invested in stocks and/or bonds. It also adds additional funds to the PRAs for low-wage workers, an additional $300 annually for those making between $5,000-$25,000, and an additional $150 annually for those making between $25,000-$35,000. In exchange for using the PRA option, part of the worker’s traditional Social Security benefit is “offset” based on a 3.7% return to the PRA. As long as the PRA earns more than an average of 3.7% annually, a worker will have higher monthly benefits upon retirement than he would under Social Security.
The second is modeled on Plan II in The Report of the President’s Commission to Strengthen Social Security. Referred to here as the “4% Plan,” it allows workers to invest four percent of their payroll annually, up to $1,000, in a PRA. Each year the limit on the amount workers can invest is indexed for wage growth. The offset rate for the traditional Social Security benefit is 2%.
The third plan is modeled on the plan detailed in “Large Accounts and Small Deficits,” a recent policy study by Andrew Biggs. Henceforth the “3%-Bond Plan,” it allows a worker to invest three percent of their payroll in a PRA. It also permits them to invest an additional two percent of payroll in their PRA, but that portion must be invested in federal government bonds. The limit on the amount that can be invested in the PRA is $2,100, indexed annually for wage growth. Furthermore, the 3%-Bond Plan has progressive offset rates for traditional Social Security. The offset rates are 2.5% for low-income workers, 3% for middle-income workers, and 3.5% for high-income workers.
The second part examines how union households would fare under these plans:
The study examined what the PRAs would return when invested in both funds from Fidelity, a well-respected investment firm, and the Thrift Savings Plan, the retirement program for Federal employees. The results show that a system of PRAs is a much better deal for today’s workers. A couple age 25 making the median income for a union household in Iowa would have under the 4% Plan an average of $1,717 more per month in retirement income over what Social Security promises, an average of $870 more under the 2.5% Plan, and $1,152 more under the 3%-Bond Plan. A low-income union household in Iowa also fares much better, netting an average of $423, $377, and $256, respectively, under the three plans.
The benefits are by no means limited to union households. The same methods employed in the study can be used to estimate benefits for any household in America. A 25-year-old household making the median income ($42,228) could expect under the 4% Plan to have an average of $1,366 more in monthly benefits over what Social Security promises to pay, $2,295 more under the 2.5% Plan, and $1,842 more under the 3%-Bond Plan. A household making just under the poverty level ($18,000) can expect $798, $648, and $558, respectively, under the three plans.
The key tables in the study are on pages 11 and 13. The methodology is on page 18, if you care to check that.
Two last things: I need to make a little plug for the group that helped PII put this study together, For Our Grandchildren. Go visit their site for more information on Social Security reform.
Also, if anyone is interested, I’ll be happy to calculate what you could expect to receive under a system of personal retirement accounts. Yes, I could get swamped with requests, but I doubt it. For me to calculate it for you, I need to know your income and your age. That most people find those things to be very personal likely ensures that my workload will be light.