There was a commentary posted February 1, 2012 about George W. Bush’s proposal to allow young people to voluntarily invest a third of their Social Security “contributions” into private accounts. That was successfully vilified as a proposal to “privatize Social Security.” The attacks were based on the lie that the proposal would reduce monthly payments to people already receiving benefits. Older people are dependable voters, and politicians scrapped an idea that would have been wonderful for younger workers.

I wrote in the earlier commentary what would have happened if the proposal had been passed by Congress. Workers could have put the proposed one third or their Social Security “contributions” into a private account invested in an S&P 500 index fund beginning in 2005. There is no doubt 2008 was a scary year for investors. Workers earning $50,000/year would have invested about $8300 into their private account from when the change was proposed. That investment would have dropped in value to about $5700 at the low point of the financial crisis. That would scare anyone! However, what would have happened if the hypothetical investor had the guts to continue to invest two percent of their $50,000 earnings as the market dropped and beyond? The monthly “dollar averaging” investments would have bought more shares in the S&P 500 index fund, and that would have had a powerful effect on the current value of the account.  

I’ve done a rudimentary estimate of what would have happened since the financial crises, and think younger workers will wish the law Bush proposed would have passed. The market has had remarkable performance since 2008. My rudimentary calculations are that the worker having the courage to continue investing would now have about $43,000 in their private accounts.

I want to be completely fair. Watching the value of investments drop during the inevitable market corrections is a very unpleasant experience. Think about the idea of having an account invested in an S&P 500 index fund that shrank in value from $8300 to $5700 in 2008. Now imagine that the stock market recovery coupled with your continued routine additions brings the value of the account to $83,000. A future correction similar to the one in 2008 would reduce the value to $57,000. Let’s say you have stuck with putting money into your account through a long working career. You are nearing retirement and the value of your account drops from $830,000 to $570,000. Terrifying!  But the market will recover your losses if history repeats itself and you have gritted your teeth and been patient.  And you could leave the money to anyone you chose, which certainly isn’t an option with Social Security.

However, the Bush proposal wasn’t passed by Congress, so you won’t have to worry about stock market uncertainty. The Social Security Administration will collect all of your taxes. I can’t believe workers watching money taken from every paycheck aren’t upset that they aren’t being trusted to manage their own money.