Follow-up: how would current retirees have fared if Social Security accounts had passed?

The Washington Times editorial I posted earlier prompted me to run some additional numbers on how Social Security benefits for current retirees would have been affected had a personal accounts reform plan been enacted.

In the Retirement Policy Outlook I published through AEI in November I showed that an individual retiring in 2008 who held a personal account his entire career would have increased his total Social Security benefits by around 15 percent. I also simulated full-career account holders retiring in years ranging from 1915 through 2008, showing that they would have increased their total benefits by between 6 and 23 percent, with an average increase of around 15 percent.

But there's a reasonable objection to these numbers: not every worker would hold a personal account their entire career. In particular, had Social Security reform passed, many workers would have held an account for just a few years before retirement – and these weren't exactly the best years to be in the market. Those with only a few years with personal accounts prior to retirement could have taken large losses.

So I ran some new numbers to test this idea. As before, I assumed that workers invested 4 percent of their earnings in a personal account holding a "life cycle" fund, which automatically held 85 percent stocks through age 30, then gradually declined to 15 percent stocks by age 60 and constant thereafter. Traditional benefits for account holders would be reduced by the amount they contributed to their accounts, compounded at the rate of return earned by government bonds. This is designed to make the traditional Social Security whole for lost taxes during working years.

As before, I assumed an individual who retired at age 65 as of November 2008, when stocks were down more than 30 percent for the year. The difference here is that I simulated account participation beginning not simply at age 21, but at every age through age 64. So we get to see the effects of having a personal account through only part of a person's working career. This will tend to exacerbate the ups and downs of the market, since there is less time to recover and revert to the long-term average.

The chart below shows the results. The full career worker receives a total Social Security benefit increase of around 15 percent, as in the previous study. (There are some very minor technical differences between the two, but nothing significant.) Total benefit gains decline through participation beginning at age 47, at which point the account holder would receive almost exactly the same benefit as someone who didn't choose a personal account.

Individuals who began participating in a personal account at ages 48 through 64 would have lost money by doing so, but these losses would be very small: on average, total benefits would be reduced by only 0.3 percent. Moreover, even this figure may be misleading, since under most reform plan specifications individuals over age 55 would not be allowed to participate in accounts, for the very reason that they would not have enough time prior to retirement.

Now, this exercise is hardly dispositive, and the usual caveats I made in the full paper apply. Yet, while anecdotal, this seems to me to be much stronger anecdotal evidence than the arguments that begin and end with, "Think what would have happened had personal accounts passed – wouldn't you have been sorry?"