Unexpectedly Intriguing!
04 March 2005

This is the second of the series of reviews I am writing related to the performance of the calculators that have been developed to provide their users with insight into whether or not the proposed Personal Retirement Account option for Social Security retirement benefits make sense for them. This review focuses on the CATO Institute's contribution to the debate.

The User Interface

The Social Security Benefit calculator produced by the CATO Institute, like the Reid/Schumer Social Security calculator, has a very simple interface. The calculator's user only needs to enter three pieces of data to get results:

  1. Their gender.
  2. Their current age.
  3. Their current annual earnings.

As noted in my review of the Reid/Schumer calculator, restricting the individual user to this limited data will significantly oversimplify the real picture for the calculator's user, since it locks the user into the assumptions made by the calculator's creators.

Sample Results

Using $40,000 as the current annual earnings and the ages that would correspond to the same birth years I used to evaluate the Reid/Schumer calculator (beginning with a current age of 30 to correspond with a birth year of 1975), I produced the following results:

Selected CATO Results
Current Age: 30 (Birth Year: 1975)
Result Male Female
Normal Retirement Age (NRA) 67 67
Estimated Annual Benefit $21,044 $21,044
Individual Account Value at NRA $355,558 $379,577
Maximum Annuity Purchased at NRA $28,975 $26,540
All monetary values presented in constant 2005 dollars.

I was unable to proceed further in generating data for those born this year, 10 years ago and 20 years ago since the CATO calculator will only produce results for those between 22 and 55 years old. This restriction prevents direct comparisons with similar data that is able to be produced by other calculators.

Analyzing the Results

The CATO calculator takes the differing life expectancies of men and women into account in allocating the accumulated value of the CATO individual account over their actuarially determined remaining lifespan. This is why the value of the Maximum Purchased Annuity for men is higher than that for women, even though the woman's individual account value at retirement is higher - women live longer and have the amount contained within their individual account paid back to them over a longer period of time, which means that they will receive less money per year since it needs to stretch further.

Also note: The means by which the CATO calculator determines the Estimated Annual Benefit from traditional Social Security was developed by ESPlanner, which does not provide free access to its tools, limiting our ability to see how good they might be to reading their testimonials.

Underlying Assumptions

When you're using the CATO calculator, you're signed up for the CATO plan for reforming Social Security. The plan effectively starts immediately within the calculator, which would not account for any transition between the traditional Social Security plan and the CATO plan. Whether or not this plan would eventually adopted by the White House and Congress remains to be seen. For what it's worth, it seems to be a nice plan, but we need to look at the assumptions behind it to see how well it holds water.

The CATO plan calls for half the the taxes paid into Social Security for each individual (6.2% of a total 12.4% of annual earnings) to be made available for individual investment accounts. This means that some 4.4% of the individual's annual earnings would be dedicated toward the "traditional" Social Security retirement and survivor's insurance program. The remaining amount would be designated toward providing Social Security's disability benefits. This assumption does not match up with the President's proposals to date, which would restrict the annual contributions to individual accounts to a maximum of 4.0% of their annual earnings once the program is fully phased in, so the program's projected individual account benefits will be significantly skewed to the high end in any direct comparison to what has already been officially proposed.

The CATO plan assumes the traditional Social Security program is reformed to provide a sustainable level of benefits without additional Social Security tax rate increases, but does not outline how in the executive summary provided for the plan, or in the plan itself (available as a 145KB PDF document.) This latter deficiency reflects the fact that no real consensus has yet emerged for dealing with the long-term sustainability of the program.

Other Issues

The CATO calculator assumes that you will begin working at age 22, which means your annual estimated benefit from Social Security may be higher or lower depending upon what age the individual actually begins earning income. For many people, the calculator's assumption that they are starting full-time work at an age of 22 would potentially miss a half-decade's worth of their actual work, so this value is most likely being understated. There are no means to alter this assumption in the calculations.

The math producing the Individual Account Value assumes that the underlying investments in the CATO plan will provide a rate of return equal to 4.95% annually when adjusted for inflation and also accounting for a .25% fee for transaction costs. This assumption is considerably rosier than that used by the Reid/Schumer calculator, but the user has no means by which to adjust it.


The CATO calculator seems to be a polar opposite from the Reid/Schumer calculator. It produces results that may be as optimistic as the Reid/Schumer calculator is pessimistic. Like the Reid/Schumer calculator, the inability to alter key assumptions within the calculator is a key weakness. As a tool, it provides an optimistic view of how an individual would fare under the CATO plan, but this point may be moot since the CATO plan would actually have to be adopted by the Congress and White House to be implemented. Thus far, the indications from both sides of Capitol Hill are that something else will be considered, so the utility of the CATO calculator in evaluating the effects of potential Social Security reform at the individual level is certainly limited.

My next review: The Heritage Foundation's Social Security Calculator!


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