September 10, 2004

September 10, 2004 | News Releases on Retirement Security

Personal Retirement Accounts Would Create Nest Eggs, Study Shows

WASHINGTON, SEPT. 10, 2004 Policy-makers can do more than just "save" Social Security; they can turn it into a system that builds inheritances for all Americans, according to a report from The Heritage Foundation's Center for Data Analysis (CDA).

The report is summarized in two new Heritage papers. Each explains how such a reform program would be structured and details the benefits of such reform.

"A modernized Social Security would allow every worker at every income level the opportunity to build a nest egg," writes David John, a research fellow in Social Security at Heritage. William Beach, director of CDA, adds, "This program would assure the benefits people are receiving today but provides an opportunity for them to get even more if they so choose."

The report shows that the key to such reform is the creation of Personal Retirement Accounts, or PRAs. Each individual worker would be able to contribute to a PRA throughout his or her career. Upon retirement, workers would own the entire amount saved. After they provide for retirement, the rest of the money could be spent immediately, used to create an annuity, or maintained as a family nest egg to use for an emergency or to pass down to an heir.

CDA conducted more than 1,000 simulations to test the reform. In every case, the reform needed to:

  • Provide retirement benefits higher than what Social Security currently provides;
  • Allow workers to build a nest egg; and
  • Make the entire Social Security system solvent for the foreseeable future.


One important outcome of this example reform plan is that it would provide a higher benefit than Social Security currently does. Today's system pays new retirees about $10,968 per year, and the reformed system would deliver at least $17,960, the report shows.

"Social Security has done a fine job of providing retirees with a stable level of retirement income," John writes. "Unfortunately, though, it actually discourages savings and is rapidly approaching bankruptcy."

Although The Heritage Foundation is not advancing its own plan, the CDA report outlines a reform agenda that would preserve Social Security and allow every worker, regardless of income, to build up a nest egg. The program would be voluntary-any worker who wishes to remain in traditional Social Security could do so.

But most people would want to be involved, Beach predicts. "Seniors no longer would have to choose between their immediate financial needs and their desire to leave money for their children and grandchildren," he says. "This plan allows them to accomplish both."

The amount invested in a worker's PRA would depend upon income. The lowest-paid workers would contribute 7 percent, and high-wage earners would set aside 2.5 percent. This money would be invested in a low-risk portfolio of 50 percent stock index funds and 50 percent government bonds. The investments would be handled by a system similar to the Thrift Savings Plan, which serves federal employees.

Under the sample plan, every worker was able to create a nest egg-even those who didn't earn much or those who started saving relatively late in life. And if retirees choose to leave a portion of their money invested, it will continue to grow, so they can leave a much larger retirement nest egg to their heirs.

The report shows that family nest eggs also would:

  • Enable moderate- and low-income workers to leave a bequest to their families;
  • Help equalize assets between upper-income and lower-income families; and
  • Change the way lower-income families view themselves and society.

Those are all positive outcomes because, as John writes, "research indicates that people with even modest assets may be more future-oriented, prudent, confident about their prospects and connected with their communities."

About the Author