In principle, we looked at three representative workers who were born in 1940 and participated from 1965 to 2004 in a hypothetical PRA plan. Workers' incomes are expressed in real inflation-adjusted dollars. The low-income worker earned $15,000 a year, the moderate-income worker $35,000 and the upper-income worker $65,000.
Their PRAs were funded through Social Security payroll taxes on a sliding scale, with workers at the low end of the income scale allowed to invest 7 percent of their incomes in PRAs and those at the top allowed to invest 2.5 percent. The mythical PRAs were invested in balanced portfolios of large-company stocks and government bonds. With the introduction of these PRAs, traditional Social Security payments would be cut in half, in order to prevent double-dipping.
This approach is novel because, unlike most other research, our analysis uses actual rates of return for stocks and bonds over the course of those 40 years.
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Case 1: Low-Income Worker.
If a worker earning $15,000 per year had set aside 6 percent of his earnings in a PRA, at retirement, the worker's PRA, under this study, would've been worth $111,000, which could be used to purchase an annuity that would provide $640 per month for life. The worker also would receive a reduced Social Security benefit of $419 per month for a monthly income of $1,058. Today, that worker receives $837 per month from Social Security, a difference of 26.5 percent.
Case 2: Low-Income Dual-Earner Couple.
A couple earning $40,000 annually would have been able to divert 6.5 percent of the wife's earnings and 5.5 percent of the husband's earnings to their individual PRAs. At retirement, they would have a combined PRA of more than $288,000, which could be used to purchase a joint and survivor annuity that would provide $1,553 per month for life. Combined with their reduced traditional Social Security benefits of $995, this would provide them with a monthly retirement benefit of $2,548.
Under current law, the couple would receive Social Security benefits of only $1,990 per month. Put another way, the couple's retirement income would be 28 percent higher if they had been allowed access to PRAs 40 years ago.
Case 3: Moderate-Income Worker.
A worker earning $35,000 per year who put 5 percent of his earnings into a PRA would build an account worth $215,000. That could be converted to an annuity that pays $1,244 per month for life. That, combined with $734 in reduced traditional Social Security benefits, adds up to $1,978 in monthly income. That's 35 percent more than the $1,468 per month that worker receives today under traditional Social Security.
Case 4: High-Income Worker.
The high-income earner, the worker making $65,000 per year over that 40-year period, also would fare better. Allowed to contribute just 2.5 percent of earnings to a PRA, this worker still would build a nest egg of more than $280,000 by retirement. That would be enough for an annuity that pays $1,618 per month, which, combined with the reduced traditional Social Security benefit of $955, would give this worker a monthly retirement benefit of $2,572. Under current law, that worker receives $1,909 per month in Social Security. Again, we see a 35 percent advantage for the worker in a PRA.