Bush's 2% Private Account Analysis

By

William R. Larsen

September 14, 2000

Bush has proposed allowing the worker to divert 2 percentage points from their OASI tax of 10.6% to a private account. This analysis puts into table form the annuity, present value of the annuity and the balance the fund would be based on assumptions listed at the bottom.

An analysis was done to calculate the balance of a private account based on age and rate of return the account earned. There are several ways to do this. The method chosen was to hold the wage constant for all age groups. By doing this, anyone may use the table simply by dividing their current yearly wage by \$10,000 and multiplying by the table amount and determine their balance or annuity.

Method Employed:

The age of the person was incremented starting at age 20 and increasing up to the age of retirement for each unique birth year. Wages were increased each year by 4.2%. Inflation does not come into play until an annuity needs to be calculated to consume the entire balance. The equation for calculating the annuity is a gradient formula. The rate of return or interest earned on the fund was incremented from 5% to 12% in one percent increments.

Table 1 lists the annuity by age a the privately invested OASI amount would pay. This is the future value of the annuity. It would the the exact dollar amount paid in the year one reached full retirement age based on social security requirements. Each subsequent year would be increased by 3%. Payments would cease when one turned 95.

Table 2 lists the present value of the annuity in year 2000 dollars. It is the same as listed in table 1. Because of inflation and wage growth, the annuity may appear in table 1 to be very large when in reality, they are not.

Table 3 lists the private balance amount based on age and rate of return one might expect to earn. These dollars are future dollars.