Unexpectedly Intriguing!
04 March 2005

Update: Welcome Capitalists' Carnival-goers! And while "Ironman" may not be my "real" name, it is my real nickname (and has been since grade school!) Then again, you have to expect some abuse when this week's Carnival of the Capitalists is being hosted by the Blogcritics, in whose spirit this week's contribution is dedicated....

I threatened to do this a while ago, but I have recently found enough spare time to check out the "competition," so to speak, where it comes to comparing the advantages or disadvantages of reforming Social Security to include a Personal Retirement Account (PRA) option.

Although I've also provided links to my more detailed reviews below, here are my basic conclusions regarding those "other" calculators, if you prefer the summarized version.

The Reid/Schumer Social Security Calculator

The Reid/Schumer Social Security Calculator is a highly flawed product. Rather than providing the user with real decision-making information that matches up with what we know about the President's plans so far, or allowing the user to alter any of the calculator's key assumptions, the results provided by the calculator are set to a predetermined fate, which is only minimally affected by the user's information. It is however, the only comparison calculator that currently considers one or more actuarial fixes that may be under consideration by members of Congress (tax rate increases, indexing future benefits to inflation vs. wage growth, absolute caps on benefits) which does provide some limited value. Since there is no guarantee that the actuarial fixes suggested by the calculator will be the ones ultimately chosen, I would advise anyone using it to not rely upon it as an authoritative source until we see what proposals will actually be adopted.

The CATO Institute's Social Security Calculator

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's results are pessimistic. Like the Reid/Schumer calculator, the inability to alter key assumptions within the calculator is a key weakness. As a tool, it provides insight into how an individual would fare under the CATO plan for reforming Social Security, 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.

The Heritage Foundation's Social Security Benefit Calculator

The Heritage Foundation's Social Security Calculator represents the Gold Standard of what is available to individuals seeking to find out how Social Security reform may affect them. The calculator is definately aimed at the "high-end" user who wants to play with detailed numbers, particularly where their PRA portfolio makeup and estate planning options are concerned. For individuals who are simply looking to see which option may be better for them, these features may be overkill, since decades may pass before they would need to make any decisions regarding how to divide up their PRA to provide an inheritance for their heirs.

The biggest weakness in the Heritage Foundation's calculator is that it assumes a full 10.6% of an individual's lifetime income will be available to invest in a Personal Retirement Account. Presently, neither the White House nor Congress have adopted this approach. Overall, it's a great execution, and the degree of customization that is available to the individual user is amazing, but more customization would make this tool even better, particularly if it allowed the user to vary the percentage they could contribute to a PRA and to also modify the rates of return on the various investment portfolio options.

Update (March 10, 2005): The Heritage Foundation provides additional details behind their calculator's methodology, and also suggests a means for users to adjust the amount of income going into a PRA. (HT: Andrew Grossman.)

Having developed a moderately successful tool that allows users to evaluate whether or not the President's proposed Personal Retirement Account option for Social Security makes sense for them, I hope these reviews provide some insight into what information I think is important for making this kind of decision as well as suggesting where future versions of my own comparison calculator may go. As always, I welcome constructive feedback!

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