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Wednesday, January 05, 2005

Undue optimism and Social Security Privatization

To follow up on my comment yesterday and the current debate about the benefits that investing in the stock market would bring to those of us who retire. I was particularly interested by an article in Roll Call (which subscription the Advocate gave me for Christmas) in which Morton Kondrake says:

"Suppose I had been able to open a personal savings account in 1967. How much better off would I be?

Larry Lindsey, Bush’s former top economic adviser and a booster of his plan, calculates that if I’d started an account at age 28 and invested one-third of my and my employers’ payroll taxes in a stock index account — up to a maximum of $1,000 a year — the account would now be worth $157,000 and pay out a monthly benefit of $911 when I retire."
Well as it happens I started work here in 1968, which is close, and from the beginning put money in a tax-sheltered annuity. I am not an expert in the stock market and also with this plan had limited options with investing. Largely, therefore, it has just accumulated over the years, although four years ago I did diversify some of it more widely. I looked at how much it is now worth last night. Not being a "top economic advisor", but rather your more typical tax payer in this regard, I did not do as well as Mr Lindsey suggests. In fact on a pro-rata basis my $1,000 a year generated around $100,000 instead of the $157,000 that is suggested above. Thus if I were to invest this for an annuity I would only get around $600 a month instead of the $900 cited above. The Roll Call article continues
" Two-thirds of my and my employers’ payroll taxes would still be invested in government bonds through the Social Security system, giving me an additional benefit of $1,179 for a total of $2,096 — a good deal better than the $1,787 a month promised in my annual Social Security statement. "
Well if I add the $600 to the $1,179 I get $1,779 which is less that the current amount.

"Timeo Daneos et dona ferentes".

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