Doing the Math on Private Accounts: Why Investors Will Want to Fund Them
YOU MAY NOT LIKE the idea of Social Security private accounts. But you will almost certainly want to fund one.</br></br>I am not arguing that the partial privatization of Social Security is a good idea (I have my concerns), and I am not arguing that private accounts will fix Social Security's financial problems (they won't). But suppose Social Security is overhauled, and suppose, as many pundits expect, that we end up with a mix of traditional Social Security benefits and private accounts, as called for in "reform model 2" suggested by President Bush's 2001 Social Security commission.</br></br>At that point, you will face a critical decision: Should you direct part of your payroll taxes into a private account, or should you continue to put everything into the traditional Social Security system? As best I can figure, it's no contest: You should go for the private account.</br></br>Model behavior. When I sat down to analyze reform model 2, I thought I was in for some heavy-duty math, comparing potential rates of return. But in fact, the break-even rate of return is built into the model -- and it's so low it makes private accounts look awfully attractive.</br></br>With model 2, you would have the option of putting four percentage points of your payroll taxes, up to $1,000 a year, into a private account. The rest of your payroll taxes would continue to flow into the old system and eventually earn you the right to a monthly check. That check, however, would be smaller than the check you would receive if you continued fully funding the traditional system.