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I
N S T I T U T E F O R W O M E N ' S P O L I C Y R
E S E A R C H
The
Real Privatizer's Social Security Calculator
Created by the National
Council of Women's Organization's Women & Social Security Project
Enter
your year of birth and current earnings (to the nearest dollar - no
commas) and click
"Calculate".
- Please note that
this calculator is designed for current workers (ages 20-55) and thus
will not accept a year of birth before 1945 or after 1980. Politicians
such as President Bush have stated that retired and those nearing retirement
will not be affected by privatization.
- For an approximation
of the potential impact of privatization on your widow or widower’s
benefit, enter your spouse’s year of birth and his or her current earnings
instead of your own. If your spouse’s benefit is higher than your own
benefit, you can switch to a widow’s benefit when your spouse (or ex-spouse
from a marriage of ten years or more) dies.
- Since the Social
Security Privatization Calculator is a Java application that runs directly
on your computer, none of information entered will travel across the
Internet.
Surprised
by the results? It's no wonder with all the misleading information out
there!
You've probably
heard politicians promise to "save" Social Security by allowing individuals
to put two percent of their wages or earnings into individual accounts.
Stocks generally have higher returns than government bonds, so setting
up individual accounts that take advantage of these higher returns should
mean more money when you retire. Right? Wrong.
In fact,
privatizing Social Security would mean less income in retirement for almost
all Americans - a lot less. While low and middle-income families will
lose the most, even well off people could easily lose money too. Why?
Because Social Security tax dollars go immediately to pay benefits for
today's retirees. Diverting two percentage points of the 12.4 percent
payroll tax (currently paid half and half by employer and employee) into
individual accounts (one-sixth of the program's revenue) creates a big
funding gap. Whether or not the stock market does well in the future,
we are committed to paying benefits to our grandparents and parents who
are already retired and living on Social Security NOW. Creating new individual
accounts while keeping our promise to retirees means deep cuts in your
future Social Security benefits. Add new administrative costs and the
costs of keeping disability and life insurance (an important benefit used
by millions of American families) and you'll find that the argument for
privatizing Social Security just doesn't add up.
Remember
- Social Security is an insurance system as well as a retirement program.
If the government continues to provide full retirement benefits to disabled
workers under privatization, the cuts created by privatization will be
even deeper than shown in this calculator!
Remember
- Returns from individual accounts would not be fully inflation-protected
like Social Security!
Calculator Information and Basic Assumptions
This Calculator
is designed to provide rough estimates for benefits under a partially
privatized Social Security system compared with the current system. The
calculator is designed for workers between the ages of 20 and 55, and
describes only retirement benefits (not disability or survivor benefits).
For a more information on your personal Social Security benefit, visit
the Social Security's web page at www.ssa.gov.
Like all
financial tools, this calculator makes a number of assumptions about future
economic growth, demographic changes, wage patterns and labor force participation.
This calculator is designed to illustrate the hidden costs of privatization
for workers who are now between the ages of 20 and 55. For estimating
your Social Security benefits based on a more detailed description of
your work and marital history, we recommend that you visit the Social
Security web sitee (www.ssa.gov).
For information on Social Security's long term solvency and related policy
questions, we recommend that you visit the web sites listed in our links
sections (below).
- Rate
of Return
- Contributions
to Individual Accounts
- Conversion
to an Annuity
- Administrative
Costs
- Transition
Costs
- Couple
Benefits and Single Worker Benefits
- Earnings
History
- Calculation
of Social Security Benefits
- Conversion
into Current Dollars
- Age
Limitation
- Solvency
Rate of Return
This
calculator is based on a return of 5 percent annually after inflation
is taken into account, reflecting a forecast for moderate economic
growth in the coming decades. This forecast is only slightly lower than
that projected by conservative economists. For example, Martin Feldstein,
a leading advisor to President George Bush, asserts that the gross return
on investment for the individual accounts should be pegged at 5.9 percent
annually after inflation (individual accounts are assumed to be invested
60 percent in stocks and 40 percent in bonds). Other leading economists,
such as Dean Baker from the Center for Economic and Policy Research, question
the likelihood of strong growth given that stock prices remain at unprecedented
levels relative to corporate earnings and the Social Security Trustees'
prediction of slowing growth in the coming decades. For example, Dean
Baker estimates that a real return of investment of only 3.5 percent annually
after inflation is taken into account. The estimate used in this
calculator is higher than progressive economists’ economists but lower
than the forecasts of conservative economists. Of course, returns from
individual accounts would also vary with some earning above average returns
and others receiving lower than average returns.
Contributions
to Individual Accounts
This calculator assumes that all workers covered by Social Security would
put two percentage points (approximately one-sixth) of their payroll taxes
into an individual account. Contributions would be made annually. For
example, a worker making $30,000 annually would divert $600 a year from
his or her payroll taxes into an individual account. It is true that if
contributions to individual accounts were made on a quarterly basis, interest
on the accounts would accrue more quickly. However, the additional interest
earnings would add only a few percentage points to individual accounts
and thus would not significantly affect the calculator’s overall results.
Following the assumptions made by Henry Aaron, Alan Blinder, Alicia Munnell,
and Peter Orszag (The Century Foundation 2000), this calculator assumes
that all workers under the age of 55 will divert 2 percent of their earnings
into an individual account. While President Bush has stated that participation
is voluntary, he has not specified the incentives for participation (such
as the size of the cuts in guaranteed benefits that workers would experience
if they opened individual accounts).
Conversion
to an Annuity
Earnings from the individual accounts are converted into annuities with
limited inflation protection using the following formula: Monthly benefit
= (Principle)/1,000*6.6 This calculation is based on the formula for Single
Life Annuities used by the Federal Retirement Thrift Investment Board
(1997). This rate is somewhat less generous than that used by other analysts
because this formula partially compensates for inflation. This rate is
indexed to inflation up to 3 percent annually; however, if inflation is
higher, the real value of the benefit will fall. The formula used in this
calculator is gender-neutral. However, private companies are likely to
charge women more for annuities because they live longer than men (on
average). Thus, women's monthly income from an annuity purchased with
their individual accounts would probably be lower than men's income. The
formula used in the calculator is for a simple, individually held account.
Monthly returns for a joint and survivor annuity (where the widow or widower
would continue receiving monthly income after their spouse had died) would,
of course, be lower.
Administrative
Costs
Administrative costs are assumed to consume one percent of the individual
account annually. This estimate is based on cost estimates for the "Personal
Security Accounts" plan by Stephen Goss, Deputy Chief Actuary of the Social
Security Administration as described in report by the 1994-1996 Advisory
Council on Social Security. For workers with low earnings, administrative
costs could be expected to consume a larger proportion of the account's
value because many administrative costs are fixed. Thus, this calculator
understates administrative costs for workers with low yearly earnings.
Some conservative economists argue that lower administrative costs could
be achieved by creating a new government agency (similar to the board
operating the Thrift Savings Plan for federal workers) that would limit
individual’s investment options to a few plans. However, in light of
statements by President Bush and other privatizers against government involvement
in the stock and bond markets, it is not reasonable to assume that advocates
for privatizing Social Security will accept the level of government involvement
(nor the public expense) required to achieve the low administrative costs
associated with a highly centralized program. Moreover, a highly centralized
approach would undercut the only clear advantage of individual accounts,
namely, the freedom for individuals to make their own investment decisions.
For more information on the administrative costs associated with individual
accounts, see the National Academy of Social Insurance Evaluating Issues
in Privatizing Social Security, November 1998 available at www.nasi.org.
Transition
Costs
To pay for the transition from a pay as you go to a pre-funded system,
economists estimate that guaranteed benefits will need to be cut substantially.
This calculator uses the following estimates for cuts in guaranteed benefits
needed to pay for individual accounts developed by economists Henry Aaron,
Alan Blinder, Alicia Munnell and Peter Orszag: 25 percent cut for those
who are now age 51 to 55, 29 percent cut for those who are now age 46-50,
33 percent cut for those now age 41-45, 39 percent cut for those now age
36-40, a 46 percent cut for those now age 34 and under. This calculator
follows the assumption that cuts in Social Security would be phased in,
with deeper cuts in the guaranteed benefit for younger workers who would
have a longer period of time to replace lost benefits through an individual
account. If benefit cuts are not phased in, a cut of 41 percent would
be required for all workers age 55 and below (see Henry Aaron, Alan Blinder,
Alicia Munnell and Peter Orszag’s. President Bush's Individual Account
Proposal: Implications for Retirement Benefits, The Century Fund 2000).
This calculator assumes that the benefits for people who are 56 and older
would not be cut. It also assumes that the disability and life insurance
component of Social Security is left largely intact (However, these estimates
do not account for the retirement of disabled persons who by definition
will have no or considerably less income from an individual account).
These assumptions are based on statements by President Bush that these
groups will not face benefit cuts.
Couple
Benefits and Single Worker Benefits
This calculator illustrates monthly benefits for a single person and the
maximum couple benefit based on one worker’s earnings record. For a married
person, or someone who was married for at least ten years, Social Security
provides spousal benefits that can add as much as 50 percent more income
to the couple’s benefit. For example, in a traditional one-earner couple,
the wife would receive a spousal benefit equal to half her husband's benefit.
Even in many two-earner families, however, one spouse has a longer and
more lucrative career and it often makes sense for the wife to claim a
spousal benefit from her husband's earnings record rather than a benefit
based on her own earnings record.
Please note
that the maximum couple benefit displayed reflects the maximum benefit
based on a single work record. Couples that both worked in the paid labor
force could receive two benefits that combined would be larger than the
maximum benefit shown. Moreover, in cases of an early death or disability
of a worker, children as well as a spouse could receive benefits that
combined would be larger than the maximum benefit displayed. In these
cases, the loss of income to the family if Social Security is privatized
would be even more extreme than depicted.
Earnings
History
Benefits are expressed in constant dollars (2000) and assume a level earnings
history over a lifetime. For example, a person who now earns a salary
equal to the average annual wage (for all U.S. workers) is assumed to
earn the average annual wage (for all U.S> workers) for his or her entire
35-year career. Someone earning twice the average wage is assumed to
earn twice the average wage, and so on. Because changes in earnings affect
Social Security and individual accounts in similar ways, this assumption
is valid for comparative purposes. Of course, in reality, most people's
earning histories vary considerably over the course of their career.
If your earnings this year were unusually high or unusually low, you could
re-calculate your benefits using what you consider to be your “typical”
earnings. A more detailed approximation of your Social Security benefits
that takes into account changes in your work history can be found on the
Social Security Administration's web site (www.ssa.gov).
Calculation
of Social Security Benefits
The Social Security Administration currently determines the Primary Insurance
Amount (PIA) with the following calculations: 90 percent of the first
$531 of the worker's average indexed monthly earnings (AIME), 32 percent
of the amount between $531 and $3,202, and 15 percent of the amount over
$3,202. This calculator converts past and future earnings into current
dollars and then applies the above formula. The calculator assumes that
in a privatization scenario, the same formula would be used for the remaining
portion of the traditional Social Security benefit.
Social Security
currently covers only wages up to $76,200. That is, individuals are only
taxed on earnings up to $76,200 (and only will only receive benefits based
on earnings up to $76,200). This calculator assumes that earnings above
the cap are not subject to the payroll tax, and consequently, that no
additional money would be diverted into individual accounts (nor will
traditional Social Security benefits increase). Thus, entering a salary
above $76,200, will not result in additional contributions to or benefits
from either Social Security or individual accounts.
Social Security
benefits are based on the highest 35 years of taxable earnings and this
calculator assumes that the user will work for exactly 35 years. If you
have a shorter career, monthly income under either scenario would be lower.
Likewise, a longer career results in higher income under either scenario.
Conversion
into Current Dollars
Earnings and benefits from all years were converted into 2000 dollars
based on the Consumer Price Index. While the contribution and benefit
base for Social Security is determined by increases in national average
wages, Social Security benefits are adjusted annually using the Consumer
Price Index. As noted earlier, this calculator assumes that the user's
earnings maintain the same relationship to average wages over time. For
example, a person earning the average wage, will earn the average wage
throughout his or her career. A person earning half (or twice) the average
wage will continue to earn half (or twice) the average wage throughout
his or her career. The calculator assumes that future wages and benefits
keep exact pace with the CPI. Because changes in earnings, wage growth
and the CPI affect Social Security and individual accounts in roughly
similar ways, this assumption is valid for comparative purposes. While
the CPI and average national wages are usually closely related, sometimes
one runs ahead of the other for a period of years. Generally, wage outpace
inflation because the U.S. experiences real economic growth which is shared
with workers. Obviously for a younger worker, the relationship between
future wage growth and inflation is not yet known. The calculator caps
benefits at the current maximum ($1,433 monthly) for an individual who
works for 35 years and ($2,149 monthly) for a couple's benefit. For a
more precise calculation of benefits, visit the Social Security Administration's
web page at www.ssa.gov.
Age
Limitation
This calculator is designed for workers who are currently between the
ages of 20 and 55. If an individual has significant earnings covered by
Social Security before the age of 20, monthly income could be higher in
either scenario. Based on comments by President George Bush, it is assumed
that workers over the age of 55 will not be eligible to participate in
privatization (nor will they be subject to cuts in their regular Social
Security. Individual accounts would be higher because interest would
be earned over a longer period of time (and presumably, more money would
be invested). Under the current Social Security system, benefits would
also be higher for two reasons (1) years with low earnings could be dropped;
(2) if the individual worked after the mandatory age of retirement, he
or she could receive additional monthly income when they do retire in
the form of “delayed retirement” benefits. Based on statements by President
Bush and other privatizers, it is assumed that workers who are 56 or older
would not face cuts in Social Security benefits due to privatized individual
accounts.
Solvency
This calculator is designed to estimate benefits for the next fifty years
under partial privatization compared with current law. As privatization
would entail a change in law, it is appropriate to compare the monthly
benefits most people are likely to receive under privatization with the
benefits they are currently entitled to under law. Based on the economic
forecasts of the Social Security Trustees, conservative analysts argue
that the current Social Security system faces a long-term solvency problem
and that, after 2037, benefits would be cut 29 percent. For many workers,
such a cut could equal the loss of income incurred under partial privatization.
However, if benefit cuts are begun in 15 years as implicitly called for
in President Bush’s proposal, rather than 37 years, reduction in benefits
would be considerably less under the current system than it would be under
privatization. If returns on investment fall below the after inflation
rate of five percent used in this analysis, cuts in overall monthly income
would be more drastic. The calculator implicitly assumes that either strong
economic performance allows Social Security to maintain benefits as current
law requires demands or the political will is found to keep benefits at
that level. For example, a transfer of $1.4 trillion of general revenue
could be put into Social Security as proposed by the Clinton Administration.
Of course, slow economic growth would negatively affect returns from individual
accounts as well as revenues from the payroll tax. Economists estimate
that President Bush's proposed partial privatization plan would remove
approximately $87 billion from the Social Security Trust Fund annually
to fund individual accounts. As this calculator shows, individual accounts
are not a solution for solvency, but rather worsen the problem.
Links
Here is a list of places for you to get more information on the hidden
costs of privatizing Social Security.
w NCWO
Women and Social Security Project
w Campaign
for America's Future
w Pizza
Economics
w Social
Security Network
w Dollars
and Sense
For More Information on Social Security Benefits visit the Social Security
Administration's web site at Social
Security Online.
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2005 by IWPR
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