Of course it's true. Here are a few sources: http://moneytalkscoaching.com/2011/0...cial-security/
Originally Posted by Bailey
Privatizing Social Security would look something like this.
The benefits of privatizing Social Security are:
Then there is the example of Chile, which privatized their version of Social Security in 1981. You can read the results at http://www.cato.org/pubs/policy_report/pr-ja-jp.html, but here is the gist:
Funding Private AccountsThe average wage in the US in 2009 was about $41,000. A person earning this amount would contribute just under $98 per week to Social Security. (Half as payroll deductions, half as employer match).
Now not all of Social Security payments are paid out as retirement payments. Disabled workers and survivors of deceased workers also receive benefits. Disability and life insurance would cover these needs and can be purchased fairly cheaply for most people. But for simplicity we will leave these benefits in the current system. About 66% of benefit payments pay retirement benefits and 34% pay everything else. We will use that same break down the example.
Using these same percentages Joe Average earning $41,000 would sock away $53 per week into his own personal Social Security retirement account. (The other $27 would fund the current disability and survivor benefits of Social Security. Or, if the whole thing were privatized that $27 per week could be used to purchase life and disability insurance.)
Now the tricky part. How much would that leave Joe Average in retirement? That’s tough to say since he isn’t likely to graduate from school, get a job earning $41,000, and make that amount for his entire life until he retires. He will most likely get a job earning less than that, then get raises and promotions along the way. But since we don’t know the specifics we will do the less than perfect thing and say that he made $41,000 for his whole life. We will say he started working at 22 and will retire at 65. We will also say that Joe Average would like his retirement savings to last him until he is 95.
The 4.2% employee contribution is reduced for 2011 from 6.2%. If we use the “normal” 6.2% contribution and move the beginning working age to 25, we get almost the same results below. Just sayin’.
We will run two scenerios. One with “reasonable” numbers and then one very conservative numbers.
The “Reasonable” Scenerio$53 per week invested at 8% interest for 43 years yields him $1,029,237. Once he is in retirement he decides to take less risk and moves his entire balance to safer investments. He earns 4% while retired.
Joe Average would be able to withdraw $4,913 a month for his entire 30 year retirement. That is $3,574 per month more than the estimated $1,339 Social Security payment he would receive. (To estimate benefits I used the birthday of May 1, 1980. Earnings of $41,000. Retirement in May 2045. And Today’s Dollars)
The “Conservative” ScenerioThe opponents of privatizing Social Security argue that the average person can’t get good returns from the stock market. They liken it to gambling. I disagree with this. Over the last 40 years the stock market has seen a gain of 11.2%. Will the stock market go up 11.2% over the next 40 years? Only time will tell. So let’s play into the opponents view that it’s not possible for Joe Average to get even reasonable gains of 8%.
So let’s say that Joe Conservative invested $53 per week and earned 6% for 43 years. He would have $557,178. At age 65 he takes all his money and puts it into a savings account earning 2% at a local bank.
With $557,178 earning 2% per year Joe Average could withdraw $2,059 a month and his money would last him 30 years. This is $720 more than the estimated $1,339 he would receive from Social Security.
What about taxes, you ask? In the conservative example, if Joe Average were paying his regular income tax rate (using 2011 tax brackets) he would owe a total of $3,281 a year if he had no deductions, or $273 per month. This is still above what he would be receiving from Social Security. In the reasonable example, Joe Average would owe$10,864 or $905 per month. Again, he would still be better off than under the current Social Security system. However since Social Security payments receive tax breaks I would like to think they still would under a privatized system. But who knows?
- Your money stays your money. You are putting money aside for your use. You don’t pay someone else’s benefits with the hope and promise that someone will come along later to pay your benefits.
- Unused funds can be inherited. Right now you could pay into Social Security your entire working life and die before you ever receive benefits. Or you die after only receiving a small benefit. If Social Security was privatized the money you set aside could be passed on.
- The government can’t reduce or withdraw your benefits. You would own your account. As it stands now you have no right to Social Security benefits. The government can change the rules at any time. If it were privatized you would not be at the mercy of the government to allow you to have your money.
The main goal and consequence of the pension reform is to improve the lot of workers during their old age. As I will explain, the reform has a lot of side effects: savings, growth, capital markets. But we should never forget that the reform was enacted to assure workers decent pensions so that they can enjoy their old age in tranquility. That goal has been met already. After 14 years and because of compound interest, the system is paying old-age pensions that are 40 to 50 percent higher than those paid under the old system. (In the case of disability and survivor pensions, another privatized insurance, pensions are 70 to 100 percent higher than under the old system.) We are extremely happy.
But there have been other enormous effects. A second--and, to me, extremely important--one is that the new system reduces what can be called the payroll tax on labor. The social security contribution was seen by workers and employers as basically a tax on the use of labor; and a tax on the use of labor reduces employment. But a contribution to an individual's pension account is not seen as a tax on the use of labor. Unemployment in Chile is less than 5 percent. And that is without disguised unemployment in the federal government. We are approaching what could be called full employment in Chile. That's very different from a country like Spain, with a socialist government for the last 12 years, that has an unemployment rate of 24 percent and a youth unemployment rate of 40 percent.
Chile's private pension system has been the main factor in increasing the savings rate to the level of an Asian tiger. Our rate is 26 percent of GNP, compared to about 15 percent in Latin America. The Asian tigers are at 30 percent. The dramatic increase in the savings rate is the main reason that Chile is not suffering from the so-called tequila effect that plagues Mexico. We do not depend on short-run capital flows because we have an enormous pool of internal savings to finance our investment strategies. Chile will grow by about 6 percent of GNP this year, the year of the "tequila effect." The stock exchange has gone down by only 1 or 2 percent and will be higher at the end of the year. Chile has been isolated from short-run capital movement because its development is basically rooted in a high savings rate.
Pension reform has contributed strongly to an increase in the rate of economic growth. Before the 1970s Chile had a real growth rate of 3.5 percent. For the last 10 years we have been growing at the rate of 7 percent, double our historic rate. That is the most powerful means of eliminating poverty because growth increases employment and wages. Several experts have attributed the doubling of the growth rate to the private pension system.
Finally, the private pension system has had a very important political and cultural consequence. Ninety percent of Chile's workers chose to move into the new system. They moved faster than Germans going from East to West after the fall of the Berlin Wall. Those workers freely decided to abandon the state system, even though some of the trade-union leaders and the old political class advised against it. But workers are able to make wise decisions on matters close to their lives, such as pensions, education, and health. That's why I believe so much in their freedom to choose.
With a bit of searching, you can find more. There was a lot of talk about this prior to the financial crisis, but the Democrats successfully demagogued the issue and frightened people away from individual accounts and the stock market, even as their policies have driven markets south.