The reason it's "not a bad deal for most people" is that it is a TOTAL LOSS to people who die before reaching the age to collect retirement benefits.
It's not such a great deal for high earners, since the benefit structure is nominally very progressive, and it's not a great deal for low earners since they have shorter lifespans (on average) and don't live long enough to collect much.
Privatization would help.
@ Minimum Wage -
You make some good points. I did not factor in longevity into the equation at all. It is true that if you die young you loose you on much of your benefit, however that would also be the case for the immediate annuities which I used to compare. Thanks for the comment.
Sure we could be missing out on some nice gains from the market by not investing it. But what happens if there's a market meltdown? Tens of millions of seniors that can no longer afford housing, medicine, or food. The political pressure to bail them out would be tremendous.
Market risk exists. That's why there's a risk premium. I prefer our government to err on the side of conservatism, miss out on some of the market returns in exchange for a rate that by your calculations still beats guaranteed US Treasuries.
@ Finance Monk
Thanks for adding to the dialog. I agree with pretty much everything you have said. As I said in my post the additional risk of private accounts would require, "a true insurance program that protects against market failures."
I did not do the analysis to figure out how much this insurance should cost (off the cuff I'd say roughly the spread between corporate and government bonds). Thus, I am happy to accept a 6% return (which slightly beats bonds) that is backed by the full credit of the US government but NOT willing to accept a 4.7% return which would be the result of a 25% benefits reduction.
Commenting by HaloScan
