Retiring in private - privatizing social security

National Review, Jan 23, 1995 by Ed Rubenstein

DO WE: a) raise Social Security taxes, b) cut benefits, or c) try a little of each? The now defunct Bipartisan Commission on Entitlements proved that U.S. politicians want none of the above. They'd rather let future pols (and voters) wrestle with the retirement program's $6.7-trillion unfunded liability.

A painless--albeit partial--alternative would permit workers to divert part of their Social Security taxes into private retirement accounts. In 1994 $58 billion, or roughly 20 per cnet, of all payroll-tax payments were surplus funds not needed to cover current retiree benefits. By law Social Security must "invest" this surplus in Treasury debt yielding around 2 per cent per year in real terms. Workers could do far better on their own.

Between 1926 and 1992 common stocks were by far the best long-term investment, earning a 10.2 average annual rate of return. Corporate bonds were a distant second. Long-term government bonds lay slightly below corporates, while Treasury bills with maturities of less than one year barely beat inflation. (To be sure, bills were far less risky, losing ground in only one year.)

LONG-TERM INVESTMENTS: TREASURIES LAG THE PACK

(Average Annual Rate of Return, 1926--1992)

                     Average      Years With:
                     Rate of   Positive   Negative
Investment           Return    Returns    Returns
Common Stocks         10.2       47         20
Corporate Bonds        5.2       52         15
30-year Treasuries     4.8       50         17
Treasury Bills         3.7       66          1
Inflation Rate         3.1       57         10