Personal Accounts for Social Security: Still the Best Deal

With the stock market in turmoil, opponents of personal accounts for Social Security have once again raised the specter of Social Security “privatization” in political campaigns across the country. “Imagine if your Social Security taxes were invested in the stock market today,” they suggest ominously. The implication is that if we had allowed today’s seniors to privately invest a portion of their Social Security taxes when they were young, those seniors would be destitute today.

But let’s look at what would really have happened. Someone retiring today, who started paying Social Security taxes when they were, say, 22, would have begun investing 43 years ago, in 1965. As Figure 1 below shows, at that time, the Dow was at 969.26. Even adjusting for inflation, as shown in Figure 2, the Dow was at 43.25.

To show just how much better a deal private investment would have been, look at Figure 3. Assume you had invested a hypothetical $100 in 1965. The redline shows what would have happened if that money had annually earned Social Security’s imputed rate of return (about 2.2 percent for someone retiring today). The blue line represents what would have happened if you earned the actual market return. If you invested $100 in 1965 at Social Security’s rate of return, today you would have $254.91. But if you invested that $100 in the market, today, even with the current down market, you would have $4,135.92.

Any way you look at it, personal accounts are still a better deal.