PRIVATIZE SOCIAL SECURITY - a personal perspective. I have posted a number of times - here, here, and here - to plead the case for privatization. Recently, Alan Sloan wrote in the Washington Post [”Let’s talk turkey about privatizing Social Security”] to deride the idea. Jagadeesh Gokhale, a senior fellow at the Cato Institute returned fire ["Distorting Social Security privatization proposals"].

Gokhale is correct; Sloan is wrong. Here’s a personal example.

I just retired at age 66 and began collecting Social Security last month. I worked 38 [FICA] years, paying into the Social Security system a total of $122,472.12. My employer(s) contributed an equal amount, for a total of $244,944.24. During those 38 years of FICA employment, I paid the FICA maximum for 21; therefore my monthly benefit of $2330 is near the Social Security maximum payout of $2346/month.

Now let’s suppose that all those FICA withholdings were invested in the stock market in a 401K-like account. I did just that, on paper, investing each years withholding in the stocks making up the Dow Jones Industrial Average (DJIA), and each year “growing” the account balance by the growth - or decline - of the average for that year. As of October 29, 2010, my retirement date, my paper Social Security account had accumulated a total of $805,307.80.

Now for the comparison. My social security income is roughly equivalent to a 50% joint life growth annuity, since payments are indexed to inflation and end when both my wife and I finally die. So I found an annuity calculator online, and asked it what an $800,000.00, 50% joint life annuity would pay out. The answer: $4,417/month (level) or $3,301/month (with an annual 3% growth factor built in).

Since Social Security has an annual cost-of-living adjustment (COLA) component, the 3% annuity is the better comparison. Guess what? $3,301/month is 42% more than $2,330/month.

At 66, I can expect to live another 16.28 years (the standard mortality tables are here). So, I can reasonably expect a lifetime return of $455,188.80 - roughly double what my employer and I jointly contributed. That means that you, the taxpayer, are on the hook for about $210,244.56 over the next 16.28 years (remember, I’m retired; I no longer pay FICA taxes since I no longer have FICA income). But if Social Security had been privatized in 1972, you wouldn’t be on the hook for a dime - or a nickel, or a penny - and I would be better off.

Now let’s look at a few other things.

In his Washington Post article, Alan Sloan argued:

Privatization is risky, subject to “market vagaries,” and the potential retiree could be forced to retire just when the stock market bottoms out. He’s right - and I had to. The stock market collapsed in 2008, suffering a 35% drop from which it still hasn’t recovered. And the data above reflects that loss! Even with that 35% drop in 2008, I would still be better off with the privatized system than I am with today’s Social Security.

Social Security is safe. Uh, not really. It’s subject to the whims of the 535 pandering dilettantes, laughingly called Congress, who are rapidly running out of other peoples’ money to spend: the Social Security Board of Trustees report that by 2037, the Social Security Trust Fund will be exhausted and able to pay out only 78% of current benefits - which ain’t all that great to begin with.

“Most people have no idea how to invest well.” To which I respond “Nuts.” My investment philosophy (invest moderately; diversify; leave it the hell alone) certainly isn’t terribly sophisticated, yet it has worked pretty well. I've been tracking my 401K investments over the last 10 years or so, comparing my investments against the growth of both the DJIA and the NASDAQ market indices. My "diversify/leave alone" strategy consistently outperforms both indices. The “no idea how to invest” trope may have some validity in the short term, but it’s not an argument for a long (40-year) investment horizon.

Former President Bush, in calling for privatization, argued that Social Security provided only about a 2% return on FICA dollars “invested.” Actually, it’s a bit of a stretch to use the term “invested” since most FICA funds are transferred directly from you to current retirees (e.g., me) and only the excess “invested” (at around 2%) in Treasury bills - which are then paid with future taxes.

Privatized Social Security is truly invested - and the long-term real growth has been relatively stable at about 3% above inflation. In my particular case, since 1972, when I first started paying FICA taxes, through last month, when I retired, the DJIA grew at an 8.11% annual rate; inflation, as measured by the Consumer Price Index (CPI), grew at an annual rate of 4.45%. Real growth (growth less inflation) averaged 3.66% over the 38-year period.

So ... privatization works. Of that, there is no doubt. It's too late for current retirees (me) to benefit, obviously, and close to too late for our children. But there is time to prevent our grandchildren from becoming poverty-stricken wards of the State.

[Update] Instapundit linked - thanks, Glenn. For those of you who followed Glenn's link, please look around; my home page is here. And please use the comments to let me know what you think of social security privatization.