Americans who confront those circumstances have been able to lead decent lives because of Social Security, while everyone else can rest assured that they, their parents, and their children won't suddenly face impoverishment. No one knows with certainty when they start their careers whether they will become disabled, whether they will be dependent on a working spouse who dies, whether they will retire with substantial financial wealth and a good pension, whether prices will soar during their retirement years, or whether they will live to be 100. As with all insurance programs, Social Security protects against those unpredictable eventualities by rewarding those who face them. Unlike other insurance programs, Social Security also makes payments to individuals who avoid the specified risks. Beneficiaries who elude the risks that Social Security insures against generally receive less from the system relative to what they have contributed to it.
Private investment accounts, on the other hand, differ fundamentally from insurance.
Every man or woman is for himself, in contrast to the pooling of contributions that enables Social Security to allocate benefits based on past earnings, current inflation rates, and whether beneficiaries faced misfortunes that the program insures against. With investment accounts, ultimate payouts are completely unpredictable and depend on luck, the ups and downs of stocks and bonds, timing, access to good advice, investment acumen, risk tolerance, and how much you have to invest in the first place. With Social Security, if you and I have the same earnings history and marital status, our benefits will be identical. Investment account fees, commissions, and administrative costs can eat up anywhere from 8 percent to 15 percent of contributions. Social Security's administrative costs are less than 1 percent of the system's revenues.