That notion came to mind as I contemplated the ongoing discussion of partial privatization of Social Security. George W. Bush feels comfortable with it and has made it a central part of his campaign. Al Gore wants to "save" Social Security. Both use projections to support their positions.
For me, projections just don't cut it. At the far extreme, it was nearly thirty years ago that the famed Club of Rome projected that the world was going to become a very dark and dreary place. Thankfully, they were quite wrong.
Less the four years ago the Congressional Budget Office was projecting federal budget deficits that went on forever. Now they are projecting surpluses that go on forever.
So instead of building models and projecting, lets ask another question. What has happened to workers that were covered by a private pension plan, not Social Security? Did they do better or worse?
George W. Bush may have gotten his confidence in privatization by considering the employees of Brazoria, Galveston, and Matagorda counties or those of Amarillo College, all in Texas. They're doing just fine without Social Security, thank you.
But lets take a broader look.
In March of 1997 two economists--- William E. Even of Miami University and David A. Macpherson of Florida State University--- published a study of seven state and local pension plans that operated independent of Social Security. Altogether, the seven plans covered a million workers who were exempt from Social Security. The plans ranged from Maine (the State Retirement System), to Ohio (the State Teachers' Retirement System), to California (the Los Angeles City Employees Retirement system) and, like Social Security, included provisions for early retirement, disability, and survivor benefits. The two economists made multiple adjustments to be certain they were making apples-to-apples comparisons.
What did they find?
• Non-FICA pension plans had higher benefits. A $40,000 a year worker retiring at 62 would receive a $30,194 a year pension, nearly twice the $15,804 a year pension a married worker would receive from Social Security. In addition, workers could retire as early as 55, something you can't do in Social Security.
• Higher Income Workers Had Even Higher Benefits. Because the Social Security benefits formula is skewed toward lower income workers and private pensions give benefits in direct proportion to income, an $80,000 worker could retire at 65 with an average pension of $75,803 a year while the same worker would receive only $22,003 from Social Security.
• Non-FICA pension plans had higher rates of return on contributions. For single workers or two earner households, the average public employee plan provided a much higher return on contributions than the expected return on Social Security contributions. Indeed, higher income workers would have a negative return under Social Security.
• The Cost of Funding the Plans is Higher than FICA taxes. On average, the plans were funded with a total contribution of 21.17 percent--- 7.98 percent from the employee and 12.95 percent from the employer. While this is significantly higher than the 12.40 percent total for the retirement and old age security taxes we pay, the retirement benefits paid by the private plans were more than proportionately higher. Each dollar of contribution provided more dollars in benefits.
Bottom line? Private funding of retirement income is an idea that works. Most important, it will move us to create a real retirement system in which each worker creates an independent nest egg.
Unfortunately, neither the privatization plans favored by Republicans nor the "save" Social Security plans favored by Democrats solve the most fundamental problem of Social Security--- the much higher taxes that will be imposed on our children to pay for currently promised benefits.
On the web:
Want to learn more? You can read the entire study (52 pages) by visiting the Third Millennium website. The study can be downloaded in PDF format.
You can also learn why we don't have enough of a federal surplus to cut taxes by downloading "Medicare, Social Security, and the Calm Before the Generational Storm" from the same website
For an introduction to Lawrence J. Kotlikoff and the idea of Generational Accounting, visit my earlier column on the subject.
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