The president's outline of his private accounts proposal has become controversial. Rejecting this proposal that has the potential to save future Social Security benefits is premature. These benefits are jeopardized by the congressional practice of appropriating Social Security tax revenues in excess of current benefit requirements for other government programs. Private accounts would put some funds beyond the reach of Congress, reducing a serious drain on future resources for Social Security benefits.
Private accounts would be invested on the basis of goals selected by the person owning the account. Depending on age, financial resources and other factors that person might select an investment that would optimize income, or one that would optimize capital appreciation. The available investments for such choices would be selected by persons with good academic and experience backgrounds in security analysis on the basis of standard criteria for making such choices.
People with average incomes would probably choose mutual funds in order to have sufficient diversity of market risk. Factors experts would consider in selecting mutual funds would include rate of return on investment in excess of an appropriate index of earnings, consistency of earnings in recent years, and stability of portfolio management.
An advantage of private accounts is the opportunity to build on compounding earnings for a period up to 45 years depending on the age of the person. Depending on rate of return, an investment of $100, or $200, per month can result in $1,000,000 invested in 45 years.
Because of short-term market volatility, this program is not suitable for people nearing retirement age.
Chile's system like this began in 1981. In gross domestic product per capita, Chile is substantially ahead of every country in South America. Several other countries have the same system.
People worried about long-term performance of American securities markets should consider the findings of the Ibbotson, Sinquefield study over the period from 1925 to 1981. Assuming a person invested equal amounts in each security listed on the New York Stock Exchange in 1925 and held it until 1981, the average return on such equity securities would be 9 percent per year. With more discriminating investment, the average would be much higher.
An additional benefit of this approach is that Congress cannot reduce benefits from funds over which they have no control. Social Security is not a property right, or a contractual obligation. Congress can change statutory benefits at any time.
Jim Winter, Payson