Private Retirement Accounts: A Trojan Horse for the Rich

If we lose Social Security, Democrats are dead so they must use attack ads against every Republican candidate who supported Private Retirement Accounts (PRA’s)

Consider three scenarios on SST (social security-traditional or current) v. SSPRA's (a la Bush) for three families retiring in 2005 at age 65 and living until 2025 at age 85, i.e. 20 yr. forecast
A. Over 90k /yr earnings
B. 45k-89.9k
C. Below 45k

Very rough forecasts of accumulated assets (A) are made for the 20 yr. time horizon for

SST (assuming raising the SS taxable earnings cap to $120k by 2015 in increments of $10k every three years).

SSPRA (Shrub plan)

SSPRACE-the certainty equivalent assets adjusted for the increased PRA risk (3% risk premium)

MIDDLE AND LOWER INCOME FAMILIES UNDER SSPRA FACE AT BEST 45-55% BENEFIT CUT, AND AT WORST 45%-70%

In all cases,
1) SST results in higher for families A,B, and C than SSPRA and SSPRACE

2) SSPRA results in A lower than SST for all three by about 30%,45%,55%, respectively

2) SSPRACE results in A lower than SST A for all three by about 45%,55%,70%, respectively.

The chief actuary of the SS Administration estimated that under SSPRA, benefits would be cut on average across the board by 45% (BW, Feb, 2005).

MIDDLE AND LOWER MIDDLE INCOME FAMILIIES ABLE TO MAKE ENDS MEET TILL DEALTH UNDER CURRENT SS PLAN BUT UNDER SSPRA AT BEST CAN'T AFTER 10-12 YEARS RETIREMENT AT WORST CAN'T AFTER 6-7 YEARS RETIREMENT.

Forecasting cost of living on a frugal, but reasonable budget including medical costs (MDCL)
1) SST's A exceeded MDCL over the relevant time horizon for families A and B and for 14 years for family C.

2) SSPRA falls below MDCL
For family A, until the 16th retirement year so if you live to age 85, you are out of money your last 5 years at age 81
For B, until the 12th retirement year so if you live to age 85, you are out of money for your last eight years, i.e. at age 77
For family C, until the 10th year so if you live to age 85, you are out of money for your last 10 years, i.e. at age 75.

3) SSPRACE falls below MDCL
For family A, until the 9th retirement year so if you live to age 85, you are out of money your last 11 years at age 74.
For B, until the 8th retirement year so if you live to age 85, you are out of money for your last 12 years, i.e. at age 73.
For family C, until in the 6th year so if you live to age 85, you are out of money for your last 14 years, i.e. at age 71.
The PRA huckstering on Fox about the "added" (as if there was a basic one) advantage of being able to give the balance of your assets via your estate is misleading (surprise). There won't be any assets to give if you live to your mortality table most likely estimate. Furthermore, under SSPRACE, the most realistic scenario set given the SSPRA average returns will fall below the historical S&P 500 (perhaps even further below than here estimates because I use a conservative 3% risk premium) due to incompetent investing by families and chicanery by mutual fund managers. There won't be any assets to give unless you die at an age two standard deviations below your mortality table most likely estimate which given the advances in medical technology would require the re-emergence of the 21st century equivalent of the bubonic plague, presumably in the form of chemical warfare