Citing annual stock market gains of 7 percent over the last 75 years, many claim that workers could get much higher returns than the system now provides by investing their Social Security contributions themselves. A stock market consistent with the Social Security projections would generate a return of about 3.5 percent. But stocks are highly risky. Even if we assume a 4 percent return from stocks, a balanced portfolio would return about 3.5 percent. The management fees for administering private accounts are estimated by the President's Advisory Council on Social Security to come to 1 percent of the accounts' value, bringing us to a typical return for a privatized account of about 2.5 percent.
Current contributions support current retirees.
If contributions are diverted to private investment accounts, taxes will have to be raised or other government benefits cut in order to pay for current benefits. Investing in the stock market is risky, and many workers would not see average returns. In addition, there is a potential for fraud and abuse, as well as the added costs of a new bureaucracy to administer a system, involving tens of millions of small accounts. The Social Security system is not in crisis, and does not need radical surgery. Like any other program, it needs to be modified to adjust to changing conditions.