Wash. Times ' Lambro misled in comparison of Social Security and private retirement accounts
Research ››› ››› DUNCAN BLACK
Washington Times chief political correspondent Donald Lambro misleadingly argued that Social Security provides a poor investment return for workers by ignoring Social Security's survivor and disability benefits.
In his March 17 column, Lambro asked, "Who today would invest in an IRA or 401(k) plan whose average yield is less than 2 percent?" But this comparison ignores Social Security's substantial insurance benefits. Unlike 401(k) plans and individual retirement accounts, participation in Social Security entitles eligible workers to receive benefits if they become disabled before reaching retirement age. In addition, if an eligible worker who has dependent children dies before reaching retirement age, his or her spouse is entitled to receive benefits, as are the children. And, upon reaching retirement age, the spouse of a deceased worker is entitled to the full retirement benefits to which the decedent would have been entitled. For 401(k) and IRA plans, heirs receive only the balance of the accounts.
For example, the Social Security Administration calculates that the surviving spouse of a worker born in 1975 who received an annual salary of $40,000 from his or her 18th birthday until death at age 30 would be entitled to a monthly benefit of $1,279 for as long as he or she had dependent children. In addition, each dependent child would also be entitled to a monthly benefit of $1,279, up to a total maximum monthly family benefit of $2,985.10. The surviving spouse, upon reaching full retirement age, would be entitled to a monthly benefit of $1,705, even if he or she had never personally paid Social Security taxes. If the decedent had a 1-year-old and a 3-year-old child at the time of death, total benefits over the 17-year period during which there would still be dependent children in the family would equal about $598,710. Before death, the decedent would have paid a total of $29,760 in Social Security taxes, not adjusted for inflation.
As further illustration, if instead of paying Social Security taxes, the worker had invested every year the entire annual contribution of $2,480 in a mutual fund earning a 6.5 percent real rate of return, an investment performance commonly assumed by advocates of privatization, at the time of death the account would contain $43,079 in today's dollars.