Economics: Why Americans Are Skeptical About Private Social Security Accounts

... a private replacement for Social Security would have to take the form of a fully-inflation-indexed annuity with zero risk of default. Under present circumstances, the private markets cannot offer annuities of this kind, at least not at the scale required to replace Social Security.

Right now, a private entity [which] wished to offer a retirement plan that was directly comparable to Social Security would have to invest its assets in a ladder of TIPS. This is the only investment that could provide inflation and default protection comparable to that provided by Social Security.

While in theory common stocks provide inflation protection, a replay of the 17-year period between 1965 and 1982 (during which the Dow lost more than 68% of its CPI-adjusted real value) would bankrupt a retirement plan that depended upon the stock market. A private retirement plan that aimed to directly replace Social Security could not afford to take such a risk.

Right now, there are not enough TIPS outstanding to support privatization of Social Security. And even if there were enough, right now 30-year TIPS are paying only 1.78% (and 5-year TIPS are yielding -0.61%!). Out of the meager yield from a ladder of such bonds, a private retirement plan would have to pay its administrative costs and generate a profit. Many analysts have criticized the poor returns promised by Social Security, but under current circumstances, it would not be possible for a private plan offering the same risk profile to do any better.

For more, see Why Americans Are Skeptical About Private Social Security Accounts by Louis Woodhill, April 13, 2011 at Forbes.