New data out of the Economic Policy Institute (EPI) confirms that Social Security delivers good dependable returns. Indeed, as much as Republicans would like to privatize Social Security, the current government-administered Social Security program is a smarter and far less risky investment than a privatized Social Security system.
Monique Morrissey of EPI compares Social Security returns to returns people might get from 401(k) and IRA investments. She finds that Social Security yields a 5.7 percent annual rate of return for a young worker today with average earnings over her working life. In contrast, 401(k) and IRA plans have returns of 3.1 percent and 2.2 percent in the 12 years between 2000 and 2012.
Morrissey notes that raising the Social Security contribution by 2.6 percent to close its projected shortfall would still deliver a significantly greater return than 401(k) and IRA plans between 2000 and 2012. The return would be 5.0 as compared to 3.1 percent and 2.2 percent.
Social Security’s internal rate of return is higher than Treasury bonds because they are based on projections about the economy. In addition, its pay-as-you-go system relies on younger generations to pay for older generations. It has a return on contributions based not on financial markets but economic growth.
Morrissey observes that Social Security’s internal rate of return should be equal to or better than investment returns over the long run. Moreover, they are less volatile. If you are unlucky enough to retire and depend on IRAs or 401(k)s in a bear market, you could be in trouble. Furthermore, unlike with Social Security, if you end up choosing a poor-performing investment in the private marketplace, a la Bernie Madoff, you are sunk.
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Here’s more from Just Care:
- Mother’s Day Gift: The Ten Should-Do’s for Your Health, Purse and Peace of Mind, Chapter One of Aging, Schmaging, a forthcoming book by Diane Archer
- Majority of voters more likely to back candidates who support lower drug prices, expanding Social Security and Medicare
- Six things to know about your 2018 Social Security benefits
- Beware: Social Security scams abound
- Social Security: What to know before claiming benefits