From Huffington PostThe best way to generate wealth for future retirees is to minimize the money that is wasted in fees for the financial industry.
Last week marked the 82nd anniversary of Franklin Roosevelt's signing the bill that created Social Security. The program has stood the test of time well.
It accounts for more than half of the income for 60 percent of senior households and more than 90 percent for almost one third. It has reduced poverty rates among the elderly from more than one-third to roughly the same as the rest of the adult population. In addition, it provides disability insurance, as well as life insurance for family members, for almost the entire working age population.
This is a pretty good track record. This is the reason the program is hugely popular and efforts at privatization, like President George W. Bush's 2005 effort, have all gone down in defeat. It's hard to beat Social Security.
A big part of the benefit of Social Security is that it is very efficient. The administrative costs of the retirement portion of the program are just 0.4 percent of what is paid out in benefits each year. By comparison, the costs of even relatively well-run privatized systems, like those in Chile or the United Kingdom, are 10-15 percent of benefits. That difference would amount to $80 billion a year (close to $1 trillion over a 10-year budget horizon) being paid out to the financial industry instead of to retirees.
This was a huge hurdle for President Bush to overcome with his privatization plan. His main route was to invent stories about the much higher returns that workers would be able to earn with the privatized accounts he promised them.
But this story of better returns turned out to be based on phony numbers. Essentially, his crew was extrapolating stock returns from a period when the economy was growing fast and price-to-earnings ratios in the stock market were much lower. Their claims about future returns could not be reconciled with the Social Security trustees growth projections that provided the basis for the debate.
To make this point, we invented the "No Economist Left Behind" test where we challenged supporters of privatization to write down numbers for capital gains and dividend yields that added to the stock returns assumed by the Bush administration. This amounted to writing down two numbers that added to 7 percent (the annual real return they assumed for stocks), a task which should not be too difficult for someone with a PhD in economics.
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