Way back at its founding, FDR talked about adding a private account component to Social Security. Today, George Bush is again proposing a private account component to Social Security. One reason for this is easy to see. Private accounts, when they are a financially conservative mix of stocks and bonds, yield much higher rates of returns than the government pay-as-you-go system.
So what if, say in 1950, the U.S. had switched to a fully private system? This would have been much easier to do back then. Social Security taxes in 1950 were just 3% per year compared to 12.4% today.
The Heritage Foundation has a Social Security calculator that tells you what you would have received if you retired today assuming that we had a system of personal Retirement Savings Accounts (RSAs), rather than pay-as-you-go Social Security. To see this for different income levels, I plugged values into the calculator and created the table below. Do you think that people retiring this year are getting a good deal for all the Social Security taxes that they paid for the last 45 years?
One thing interesting in this table is how the lowest income Americans make out. Consider the person that retired making just $10/hour. The calculator assumes that you therefore had a low income all of your life. But over 45 years - you still paid a lot of Social Security taxes. And with compound interest, this creates a nice lump sum at retirement to buy an annuity. In fact, at retirement you could have received $2531 a month for the rest of your life! Instead, you are only going to receive $995 month.
The great irony here is that the political left, who claim to represent the poor, would have opposed private accounts in 1950 just like they oppose them today. It seems that liberals are more caught up ideology (and of course opposing George Bush) than they are in finding the solution that is best for low income Americans.