Social Security Reform: The Effect of Economic Variability on Individual Accounts and Their Annuities

Social Security Reform: The Effect of Economic Variability on Individual Accounts and Their Annuities

Order Code RL31324
Report for Congress
Received through the CRS Web
Social Security Reform: The Effect of Economic
Variability on Individual Accounts and Their
Annuities
Updated February 13, 2003
Geoffrey Kollmann, Dawn Nuschler, and Patrick Purcell
Domestic Social Policy Division
Congressional Research Service ˜ The Library of Congress

Social Security Reform: The Effect of Economic
Variability on Individual Accounts and Their Annuities
Summary
Whether proposed as a supplement or as a replacement of part or all of Social
Security, individual accounts are a major issue in the debate about reforming the
program. The debate usually focuses on philosophical and budgetary issues about
the nature of the program and its future role, and on how individual accounts could
be financed. However, there is another issue that tends to arise late in the discussion:
how would such accounts be disbursed? Because of concern that many recipients
could exhaust their accounts and end up with inadequate income, it is often stipulated
or suggested that individual accounts be converted into a lifetime annuity – a stream
of payments that continue for as long as the recipient lives.
Converting individual accounts into annuities, particularly ones that would
duplicate Social Security’s inflation protection, would create its own issues.
Typically, an annuity’s value is a function of the account assets, the expected lifetime
of the annuitant(s), the rate of return, subsequent inflation, and administrative costs.
Existing annuity arrangements usually set the rate of return at an interest rate that is
fixed at the time of retirement, and almost never offer full inflation protection. Thus,
the value of the annuity is subject to multiple variables, most of which depend on
economic circumstances. This report examines the potential variability caused by
economic conditions by projecting the value of annuities from individual accounts
as a proportion of Social Security benefits promised under current law. It does so by
duplicating the year-to-year economic conditions (wage and price growth, interest
rates, and the return on the S&P 500 stock index) that occurred in the last 76 years.
The annuities examined assume workers would pay 2% of their pay into individual
accounts for periods of 10, 20, 30, and 41 years (41 years representing a full career).
The results show that the value of individual accounts is highly sensitive not
only to investment performance during the accumulation phase but also, if converted
to an annuity, to the rate of interest prevailing at the time of retirement. The greatest
disparity in annuity values found in this study is for workers who invested entirely
in stocks for 20 years. If the economic conditions were the same as in 1955-1974,
their annuities would replace 5.7% of their Social Security benefit. However, if the
economic conditions were the same as in 1980-1999, their annuities would replace
39.8% of their Social Security benefit, seven times as much. If, instead, workers
invested throughout a full career, the maximum disparity would be less (a factor of
4.3, instead of 7). The degree of volatility would be lower if the interest rate for the
annuity were variable instead of fixed. Adding bonds to the portfolio also would
help to limit volatility in the values of the annuities, but over any appreciable period
of time these values would be lower than those produced by an all-stock portfolio.
These results could be interpreted to support both sides of the privatization
debate. Opponents could point out that the substantial volatility illustrates the risks
and uneven treatment that individual accounts would impose on Social Security
recipients. Supporters could claim that, even though there is volatility, in the large
majority of cases individual accounts would provide workers with annuities that
would be higher than what Social Security would provide under current law.

Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
What is an Annuity? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
How Does the Federal Thrift Savings Plan Annuitize Benefits? . . . . . . . . . . 6
Methodology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Projected Annuity Values as a Proportion of Social Security Benefits . . . . . 9
Accounts Invested in Funds that Track the S&P 500 . . . . . . . . . . . . . . 9
Effect of Fixed Interest Rate on Degree of Variability . . . . . . . . . . . . 14
Effect of Adding Bonds to Investment Mix . . . . . . . . . . . . . . . . . . . . . 19
Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Cautionary Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Appendix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Methods and Basic Assumptions Used to Prepare Report . . . . . . . . . . . . . . 30
How Disbursements From Individual Accounts Are Handled Under
Other Systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Tables and Summary Statistics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
List of Figures
Figure 1. 10-Year Accumulation
Value of Annuities as a Proportion of Social Security Benefits for
Workers Contributing 2% of Pay Into Individual Accounts for 10 Years
(Account Invested in S&P 500, Annuity at Fixed Interest Rate) . . . . . . . . . 10
Figure 2. 20-Year Accumulation
Value of Annuities as a Proportion of Social Security Benefits for
Workers Contributing 2% of Pay Into Individual Accounts for 20 Years
(Account Invested in S&P 500, Annuity at Fixed Interest Rate) . . . . . . . . . 11
Figure 3. 30-Year Accumulation
Value of Annuities as a Proportion of Social Security Benefits for
Workers Contributing 2% of Pay Into Individual Accounts for 30 Years
(Account Invested in S&P 500, Annuity at Fixed Interest Rate) . . . . . . . . . 12
Figure 4. 41-Year Accumulation
Value of Annuities as a Proportion of Social Security Benefits for
Workers Contributing 2% of Pay Into Individual Accounts for 41 Years
(Account Invested in S&P 500, Annuity at Fixed Interest Rate) . . . . . . . . . 13

Figure 5. 10-Year Accumulation
Value of Annuities as a Proportion of Social Security Benefits for
Workers Contributing 2% of Pay Into Individual Accounts for 10 Years
(Annuity at Fixed and Variable Interest Rates) . . . . . . . . . . . . . . . . . . . . . . 15
Figure 6. 20-Year Accumulation
Value of Annuities as a Proportion of Social Security Benefits for
Workers Contributing 2% of Pay Into Individual Accounts for 20 Years
(Annuity at Fixed and Variable Interest Rates) . . . . . . . . . . . . . . . . . . . . . . 16
Figure 7. 30-Year Accumulation
Value of Annuities as a Proportion of Social Security Benefits for
Workers Contributing 2% of Pay Into Individual Accounts for 30 Years
(Annuity at Fixed and Variable Interest Rates) . . . . . . . . . . . . . . . . . . . . . . 17
Figure 8. 41-Year Accumulation
Value of Annuities as a Proportion of Social Security Benefits for
Workers Contributing 2% of Pay Into Individual Accounts for 41 Years
(Annuity at Fixed and Variable Interest Rates) . . . . . . . . . . . . . . . . . . . . . . 18
Figure 9. 10-Year Accumulation
Value of Annuities as a Proportion of Social Security Benefits for
Workers Contributing 2% of Pay Into Individual Accounts for 10 Years
(Account Invested Entirely in Stocks and in 60% Stocks, 40% Bonds) . . . 20
Figure 10. 20-Year Accumulation
Value of Annuities as a Proportion of Social Security Benefits for
Workers Contributing 2% of Pay Into Individual Accounts for 20 Years
(Account Invested Entirely in Stocks and in 60% Stocks, 40% Bonds) . . . 21
Figure 11. 30-Year Accumulation
Value of Annuities as a Proportion of Social Security Benefits for
Workers Contributing 2% of Pay Into Individual Accounts for 30 Years
(Account Invested Entirely in Stocks and in 60% Stocks, 40% Bonds) . . . 22
Figure 12. 41-Year Accumulation
Value of Annuities as a Proportion of Social Security Benefits for
Workers Contributing 2% of Pay Into Individual Accounts for 41 Years
(Account Invested Entirely in Stocks and in 60% Stocks, 40% Bonds) . . . 23
List of Tables
Table 1.
Value of Annuities as a Proportion of Social Security Benefits
for Workers* Paying Into Individual Accounts for 10 Years
(Account Invested in S&P 500, Annuity at Fixed Interest
Rate) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Table 2.
Value of Annuities as a Proportion of Social Security Benefits
for Workers* Paying Into Individual Accounts for 20 Years
(Account Invested in S&P 500, Annuity at Fixed Interest
Rate) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Table 3.
Value of Annuities as a Proportion of Social Security Benefits
for Workers* Paying Into Individual Accounts for 30 Years
(Account Invested in S&P 500, Annuity at Fixed Interest
Rate) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Table 4.
Value of Annuities as a Proportion of Social Security Benefits
for Workers* Paying Into Individual Accounts for 41 Years
(Account Invested in S&P 500, Annuity at Fixed Interest
Rate) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39

Table 5.
Value of Annuities as a Proportion of Social Security Benefits
for Workers* Paying Into Individual Accounts for 10 Years
(Account Invested in S&P 500, Annuity at Variable Interest
Rate) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Table 6.
Value of Annuities as a Proportion of Social Security Benefits
for Workers* Paying Into Individual Accounts for 20 Years
(Account Invested in S&P 500, Annuity at Variable Interest
Rate) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Table 7.
Value of Annuities as a Proportion of Social Security Benefits
for Workers* Paying Into Individual Accounts for 30 Years
(Account Invested in S&P 500, Annuity at Variable Interest
Rate) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Table 8.
Value of Annuities as a Proportion of Social Security Benefits
for Workers* Paying Into Individual Accounts for 41 Years
(Account Invested in S&P 500, Annuity at Variable Interest
Rate) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Table 9.
Value of Annuities as a Proportion of Social Security Benefits
for Workers* Paying Into Individual Accounts for 10 Years
(Investment in 60% Stocks/40% Bonds) . . . . . . . . . . . . . . . . . . . 49
Table 10.
Value of Annuities as a Proportion of Social Security Benefits
for Workers* Paying Into Individual Accounts for 20 Years
(Investment in 60% Stocks/40% Bonds) . . . . . . . . . . . . . . . . . . . 51
Table 11.
Value of Annuities as a Proportion of Social Security Benefits
for Workers* Paying Into Individual Accounts for 30 Years
(Investment in 60% Stocks/40% Bonds) . . . . . . . . . . . . . . . . . . . 53
Table 12.
Value of Annuities as a Proportion of Social Security Benefits
for Workers* Paying Into Individual Accounts for 41 Years
(Investment in 60% Stocks/40% Bonds) . . . . . . . . . . . . . . . . . . . 55
Table 13.
S&P 500 Annualized Total Real Rates of Return
Over 41-Year Periods, 1926-2002 . . . . . . . . . . . . . . . . . . . . 57

Social Security Reform: The Effect of
Economic Variability on Individual Accounts
and Their Annuities
Introduction
Whether proposed as a supplement or as a replacement of part or all of Social
Security, individual accounts are a major issue in the debate about reforming the
program. The debate is deeply philosophical, as it concerns the fundamental nature
and purpose of the nation’s primary income replacement system for workers and
their families when they retire, become disabled, or die. Proponents of individual
accounts stress that the Social Security system is not only facing serious long-range
financial problems, but also that its inherent rate of return, i.e., the value of its
benefits compared to the value of the taxes paid to support it, is very low compared
to the value of the benefits that would be provided if those taxes were invested
directly in financial markets. Opponents dismiss this “moneysworth” argument as
irrelevant to the basic social purposes of the program and maintain that creating
individual accounts would be too costly, too risky and would benefit mainly the
financially better-off.
There is much literature on these philosophical issues.1 There is also ongoing
research into the practical issues involved in creating and administering individual
accounts.2 A less-studied issue that blends philosophical and practical considerations
is how the proceeds of such individual accounts would or should be disbursed.
Ordinarily, retired workers have a choice of how to receive income from
arrangements that accumulate savings for retirement. For example, they can choose
to receive a lump sum or periodic payments from a defined contribution pension plan
or an Individual Retirement Account (IRA). However, Social Security was designed
as a “social insurance” system that provides benefits that do not directly represent
personal savings but, provided eligibility requirements are met, are a right to a
monthly stream of payments for as long as an eligible recipient lives. Furthermore,
unlike private assets, by law Social Security benefits receive annual cost-of-living
adjustments that maintain their purchasing power. Thus, supporters of Social
Security maintain that it provides a reliable bedrock of protection that is not eroded
by inflation or ever depleted, thus reducing poverty, and its demeaning consequence
of reliance on welfare, among the elderly. The concern expressed by these supporters
1For example, see CRS Issue Brief IB98048, Social Security Reform, by Geoffrey Kollmann;
and GAO Report AIMD/HEHS-00-29, Social Security: Evaluating Reform.
2 For a discussion of these issues see GAO Report HEHS-99-122, Social Security Reform:
Implementation Issues for Individual Accounts.

CRS-2
is that individual accounts could not provide similar protection, as people could
outlive the assets in their accounts because of poor or unlucky financial management,
inflation, or underestimation of their lifespan. In response to this concern, an
approach included in many privatization proposals is to mandate that the value of the
account at retirement be used to purchase an annuity that would provide a monthly
benefit for the rest of the recipient’s life.3
While annuitization might address the philosophical question of how to protect
recipients from the risk of outliving their assets, it raises some practical issues. The
level of the “annuity” Social Security provides is defined in law and is indexed to
inflation. Annuities provided in the private sector generally are not indexed to
inflation, and the amount of the annuity is dependent on demographic4 and economic
factors. The economic factors are the value of the account and the prevailing rate of
interest on the date of annuitization, and the rate of inflation experienced after
retirement. All else held equal, the variations in these economic factors can cause
significant differences in the value of the annuities recipients could receive from
individual accounts.
The purpose of this paper is to focus on the effect of economic variability on
individual account annuities. In doing so, it takes no position on individual accounts.
Rather, it attempts to portray the range of effects that economic variability could have
on the annuities individual accounts could provide.
This analysis uses a model that CRS developed to calculate the value of Social
Security benefits under current law and potential individual account balances and
their annuity values. Both types of calculations are dependent on economic factors,
such as wage and price levels, and the rates of return on investments. Both also are
affected by demographic factors, such as the probabilities of survival for different age
cohorts. In order to use an extant annuity system as an example, the report examines
the design and features of the Thrift Savings Plan (TSP) available to federal workers.
The TSP is cited by proponents as an exemplar of how individual accounts could be
administered.5
The economic factors on which the value of an annuity is dependent are variable
to an unknown degree. For purposes of analyzing the effects of Social Security
reform, the accepted convention is to use the demographic and economic
assumptions contained in the intermediate projections of the Social Security Board
of Trustees, and the CRS model uses them accordingly. In one sense, it is almost
imperative, because the Trustees’ intermediate projection is the yardstick that
Congress traditionally uses to judge not only the financial condition of the Social
3Ten of 15 Social Security reform bills in the 106th Congress, and eight of the nine
introduced in the 107th Congress, proposed that all or part the disbursements from individual
accounts be in the form of an annuity.
4The rate of mortality is particularly important because the cost of an annuity depends in part
on how long a recipient can be expected to collect benefits.
5Four of the Social Security reform bills in the 106th and 107th Congresses state that the
annuitization of individual accounts should be in accordance with requirements applied to
the federal Thrift Savings Plan.

CRS-3
Security program, but also the effect of reform measures on the program’s cost.
However, beyond the first few years, the Trustees’ intermediate assumptions for
future economic conditions settle into a constant pattern and do not reflect the year-
to-year variability that inevitably would occur. Thus, using the Trustee’s long-range
assumptions to project the effect of individual accounts, and of the annuities
potentially payable from them, gives no indication of the effect economic variations
would have on account and annuity values.
There is no clear standard by which to predict future variations in economic
conditions. To postulate one would be subjective, and could be open to criticism that
the choices made were designed to prove a particular point. However, there is one
way to restrict these choices, and that is to replicate year-to-year economic conditions
that occurred in the past. The past obviously does not predict the future, but it does
represent what is possible because it actually happened. Therefore, to give an
indication of the possible effects of economic variations on individual accounts and
the annuitization thereof, this report examines what would happen if economic
conditions during different historic time periods were to recur in the future.6
This method has been used by others to support both sides of the privatization
debate. Proponents of individual accounts tend to point out that historically the stock
market has outperformed other investments and maintain that, if workers’ Social
Security taxes had instead been invested in a broad stock portfolio, they would have
provided much higher benefits than provided to Social Security recipients today.
Opponents tend to point out that investment in the stock market carries risk and that
its performance has been inconsistent, illustrating that the value of the amount
accumulated in an individual account would have varied widely because of vagaries
in the past performance of financial markets. This report uses these historical
approaches by modeling the effect of economic performance not only on the
annuities produced by these accumulations, but on Social Security benefits as well.
This procedure allows the value of the account annuities to be measured relative to
current-law Social Security benefits, so that the variations in the value of the
annuities are portrayed not only as matters of degree but also as the extent to which
the annuities would supplement or replace current-law Social Security benefits.
Comparisons of individual accounts to Social Security naturally tend to focus
on the effects on workers who have contributed to the account throughout their
career. However, if a system of individual accounts were created, there would be a
long period during which older workers would not have much time to contribute to
the accounts. To show the effects of shorter time periods over which to pay into an
individual account, this paper illustrates what annuities could be if workers paid 2%
of their pay7 into individual accounts for periods of 10, 20, 30, and 41 years (41 years
representing a full career).
6This approach is similar to one used by Gary Burtless in 2000. See Burtless, Gary. Social
Security Privatization and Financial Market Risk. Center on Social and Economic
Dynamics Working Paper No. 10, February 2000, available at [www.brookings.org]. The
results presented in this report are consistent with those portrayed in Mr. Burtless’ paper.
7This percentage is often specified in reform proposals and was suggested by the President
in his 2000 campaign.

CRS-4
Background
Social Security has projected long-range funding problems. According to the
latest estimates of the Social Security Board of Trustees, in 2041 its trust funds will
be depleted. At that point its incoming tax receipts would be sufficient to cover only
73% of its benefits and even less in later years.8 The actual fiscal pressure Social
Security will place on the government will arise sooner, in 2017, when Social
Security’s annual tax revenue begins to lag its annual cash outlays.
The primary reason for this long-term trend is demographic: increasing life
expectancy and low birth rates are creating an older society. The looming retirement
of the post-World War II baby boom will accelerate this aging process. By 2025 the
number of people 65 and older is predicted to rise by 74%. In contrast, the number
of workers whose taxes support the system is projected to grow by only 14%. As a
result, the ratio of workers supporting each recipient is projected to fall from 3.4
today to 2.3 in 2025.
In response to these projections, an assortment of measures designed to solve
the financing problem have been proposed by various authors, commissions, think
tanks, and lawmakers. Many of these proposals include the creation of personal
accounts as a supplement to or partial replacement of Social Security. Their
proponents say that individual accounts would give workers more ownership and
control of the assets they will need in retirement and would produce a higher value
than the Social Security benefit the accounts would supplement or replace, because
the rate of return would be substantially higher than that provided by the current
Social Security system.
These proposals often provide for placing these assets in the stock market,
usually in funds indexed to reflect the overall rate of return for a broad portfolio of
stocks, such as the Standard and Poor’s (S&P) 500.9 Because over long time periods
stocks have produced a high overall return, standard portrayals of the value of
individual accounts projected over a worker’s career usually show impressive
accumulations by the time a worker retires. For reasons mentioned in the
introduction, many proposals provide that these accumulated assets be annuitized.
What Is an Annuity?10
An annuity, from the Latin annuus, meaning yearly, is an amount payable yearly
or at some other regular interval over an agreed-upon period of time. In the current
context, an annuity is the product of a contract between an individual and an insurer
(e.g., an insurance company or the government) in which the individual purchases the
8Intermediate projections of the 2002 Annual Report of the Board of Trustees of the Old
Age, Survivors, and Disability Insurance Trust Funds, April 9, 2002.
9One of the two stock-index funds offered by the federal TSP, the “C fund,” is indexed to
the S&P 500.
10The following description borrows in part from a report by the Congressional Budget
Office entitled Social Security Privatization and the Annuities Market, February 1998.

CRS-5
right to a stream of future payments. A “life annuity” provides payments for as long
as the annuitant lives, thus insuring that the individual will never be without income.
The insurer assumes the risk that the person will live a long time, but can do so by
pooling many annuitants together, thereby offsetting the probability that some
annuitants will live longer than expected with the probability that some will die
sooner than expected. Private insurers also charge a premium to account for risk and
to provide a profit.
There are different types of life annuities. Annuities can be purchased to protect
only the individual (an individual annuity) or to protect a spouse if the individual dies
first (a joint annuity). The amount of the periodic payment can be fixed or variable.
A fixed annuity guarantees a constant payment amount. A fixed “graded” annuity
provides a guaranteed minimum payment that increases by a set percentage each year,
and is usually used as a hedge against inflation. An “indexed annuity” provides a
payment that is periodically adjusted to reflect the actual rate of inflation. Social
Security, with its annual cost of living adjustments, is an indexed annuity.
Heretofore, indexed annuities have been virtually unavailable in the private sector.11
Variable annuities provide payments that rise and fall over time based on the
performance of the portfolio in which they are invested. Sometimes they guarantee
a minimum payment with the possibility of an additional benefit payment that
depends on the portfolio’s performance.12
The cost of purchasing an annuity depends on several factors: the rate of return
the insurer expects to receive on its investments; the probability of annuitants
surviving in each subsequent year; the cost of administering the annuity accounts;
and the profit sought by the insurer. However, in the context of Social Security
reform, the issue would not be phrased in terms of the costs of purchasing an annuity,
but rather, given the value of a personal account at the time of retirement, what
monthly benefit would the annuity provide?
Rates of return are inherently uncertain. Generally, higher returns are associated
with higher risk. Private insurers tend to minimize that risk by investing in bonds,
mortgages, and real estate, and the internal rates of return of annuities generally
reflect the long-term corporate bond rate.13 There is also a degree of uncertainty in
future mortality rates, especially as they are dependent on the characteristics of the
particular annuitant population. Administrative costs are basically the overhead
associated with advertizing, managing assets, labor costs, customer service, etc.
11Lincoln National Life Insurance Company recently began to offer an inflation-indexed
single premium immediate annuity, called “Inflation Proofer.”
12Perhaps the best-known examples of variable annuities are those provided by the Teachers
Insurance and Annuity Association – College Retirement Equities Fund (TIAA – CREF).
13Warshawsky, Mark J. The Market for Individual Annuities and the Reform of Social
Security. Benefits Quarterly, third quarter 1997.

CRS-6
How Does the Federal Thrift Savings Plan Annuitize
Benefits?
The federal Thrift Savings Plan (TSP) is part of the retirement program provided
to federal employees. It is similar to defined contribution pension plans established
under Section 401(k) of the Internal Revenue Code that allow employees to save part
of their earnings on a tax-deferred basis. It is important to note that the TSP does not
serve as a substitute for Social Security, but as part of two different federal retirement
plans, both of which also include a defined benefit14 pension component and, for one
of those plans, Social Security as well.
Federal workers have their choice of five funds in which to place their TSP
contributions. One, the “C fund,” which often is proposed as a model for investing
individual accounts in the stock market, is indexed to the S&P 500. Since its
inception in 1988, the C fund has tracked the performance of the S&P 500 very
closely.15
When federal workers leave the government, they have several ways to
withdraw the amount accumulated in their TSP accounts. One is to receive a life
annuity. As mentioned earlier, many of the Social Security reform proposals that
feature individual accounts provide that upon retirement the accounts be annuitized
in a manner similar to the TSP.
The manner in which the TSP provides an annuity is to purchase it from a
provider. Currently, that provider is Metropolitan Life Insurance Company (Metlife),
a major national insurance company competitively chosen by the Federal Retirement
Thrift Investment Board. The types of annuities offered are single or joint life
annuities with either fixed or graded monthly payments. The graded annuity is
adjusted each year to reflect increases in the Consumer Price Index, but the
adjustment cannot exceed 3%.
Workers may use a worksheet or an annuity calculator on the TSP website to
estimate their monthly payments. The interest rate used in making the estimate is
based on the current 3-month moving average rate of 10-year U.S. Treasury notes.
This rate of interest is binding, i.e., once the annuity begins, changes in the 10-year
U.S. Treasury rate have no effect on the level of the monthly payments.
Annuities payable from the TSP first began in 1989. Since then, the 3-month
moving average of the 10-year U.S. Treasury rates has ranged from 4.0% to 9.25%.
For a worker retiring at age 62 with a given amount accumulated in a TSP account,
14A defined benefit plan is one in which the benefit is determined by a specific formula, such
as 1% of a worker’s highest salary times the number of years of service, and the risk of
financing the plan falls mainly on the employer. Benefits in a defined contribution plan are
determined by the investment return on the contributions to an employee’s account, and the
investment risk falls on the employee.
15For the 10-year period 1993-2002, the C fund’s annual rate of return was 9.29%, while the
S&P’s annual rate of return was 9.34%.

CRS-7
the 9.25% rate produces an annuity that is 58% higher than that produced by the
4.0% rate.16
Methodology
In order to calculate the effect on annuities if the economic conditions of the
past were to recur in the future, the CRS model was adjusted to reflect wage levels,
inflation, long-term government bond interest rates, and the total return of the S&P
500 that occurred each year from 1926 through 2002. For example, if individual
accounts invested in the S&P 500 were to begin in 2003 and one wished to know
their potential value as an annuity for someone who will retire in 2023, the model
projects economic performance over the next 20 years under 58 scenarios, reflecting
each 20-year period in the past 76 years, beginning with 1926-1945 and ending with
1983-2002. To depict the relative value of the annuity, its present value is compared
to the present value of the Social Security benefit that would be payable under current
law benefit rules and under each economic scenario. This method was chosen
because it is commonly used to illustrate how much of the Social Security benefit an
individual account could replace. Because replicating the economic performance of
the past 76 years into the future affects not only the value of the individual account
but the value of the Social Security benefit as well, depicting the value of the
individual account as a percentage of the Social Security benefit takes into account
the effect of the economy on both.17
An issue raised by this depiction is the choice of the illustrative worker used in
the analysis. Illustrations of the effects of reforms on the Social Security program
often depict a full-career worker who always earned an average wage. It is
recognized that this does not represent a “typical” worker, but that it is useful for
portraying the effects of reforms in generalized terms. There are limitations in
applying this scenario to the issues addressed in this paper. The Social Security
benefit formula is designed so that workers with low career earnings receive a benefit
that replaces a larger proportion of their earnings than do workers with high career
earnings. In contrast, everything else held equal, the value of a worker’s individual
16Because the differences in interest rates have a greater effect the longer the period over
which the annuity is paid, the largest effect of these differences is on younger retirees. As
federal retirees can retire before age 62 (as early as age 55), the effect of differences in
interest rates on annuities would be greater than it would be for Social Security retirees. For
example, for workers retiring before age 60, the above difference in interest rates would
make a difference in the annuity of 67%.
17There are two effects of economic performance on Social Security. The effect depicted
here is on the value of an individual’s benefit. Social Security benefits are sensitive to the
relationship of wage and price levels (for a discussion of this sensitivity, see CRS Report
92-333, Social Security: The Effect of Economic Variations on Benefits, by Geoffrey
Kollmann). Their present values also are sensitive to changes in interest rates. The other
effect, not depicted here, is on the financial health of the system as a whole, as wage growth
relative to price increases, employment rates, and interest earned by the trust funds affect
the degree to which the system is under-or over-funded as a whole. In this regard, the
financial condition of the program can indirectly have an effect on benefits, as it ultimately
determines the level of benefits that can be supported by the program’s financial resources.

CRS-8
account would be strictly proportional to the level of his or her earnings. This means
that, for a given rate of contributions and rate of return, an individual account would
replace a lower proportion of the Social Security benefit of a low-paid worker than
for a high-paid worker. Also, using as an example a worker who always earned an
average wage may overstate the value of individual accounts. Typically, many
workers start work in entry level jobs with relatively low wages and earn higher
wages as they advance in their careers. Because of the power of compound growth,
contributions made early in a career have a disproportionate effect on the eventual
value of the account. Everything else held equal, the lower contributions made early
in their careers would result in smaller account balances than those shown for a
worker who always earned an average wage.
At first glance, this may appear unimportant, because by focusing on the effect
of economic variations on the annuities produced by individual accounts relative to
Social Security for workers with the same characteristics, this paper draws attention
to the magnitude of the differences between annuity values rather than on the values
of the annuities themselves. However, while not the main focus of this paper, it is
useful to know what these values are, and by showing what proportion of Social
Security benefits the annuities would replace, the paper also illustrates the relative
value of the accounts. In recognition of these concerns, the illustrative worker used
in this report, while based on a worker whose Social Security benefit is equal to that
of a worker who always earned the average wage, has yearly earnings that are
“scaled” in accordance with a recent publication of the Social Security
Administration (SSA) that adjusts work histories to take into account typical career
patterns.18 Consistent with the data in the SSA document, the worker is assumed to
begin work at age 21 and work every year until retiring at age 62 (the age at which
most workers retire today). He or she is assumed to be unmarried, and thus would
receive a “single life” annuity.19
As mentioned earlier, the interest rate on which a fixed annuity is based is
determined at the time the annuity is purchased, and usually reflects the current long-
term government or corporate bond rate. Because the interest rate earned by new
issues of U.S. government securities to the Social Security trust funds is based on the
average rate earned on current outstanding long-term government debt, the CRS
model uses it as a proxy for the rate of reform on long-term bonds for the period from
1937 to the present. (For the period 1926-1936, which was before the creation of the
trust funds, a comparable set of numbers was constructed from data on U.S. bonds.)
A more complete description of the methodology used in the report may be found in
the Appendix.
18Social Security Administration. Office of the Actuary. Internal Rates of Return Under
the OASDI Program for Hypothetical Workers. Actuarial Note No. 144, June 2001. The
pattern in these scaled earnings histories shows relatively low earnings at the beginning of
the career, fairly rapid growth through the middle of the career, and a gradual tapering off
of earnings at the end of the career.
19A joint annuity would produce a smaller monthly benefit to account for the longer
combined lifespan of a couple. Social Security implicitly provides a joint survivor annuity
to all recipients automatically with no explicit reduction in the worker’s monthly benefit.

CRS-9
Results
Projected Annuity Values as a Proportion of Social Security
Benefits
The following graphs show the projected values of the annuities produced by
individual accounts as a proportion of the Social Security benefits promised under
current law for workers retiring at age 62 in the future. These values are shown for
workers with “scaled” average earnings (previously described) who, beginning in
2003, contribute 2% of pay into an individual account. The results for each period
are calculated under the appropriate number of variations occurring in the 77-year
period from 1926-2002. For example, the value of an annuity of someone who will
retire in 2013 is projected over 10 years under 67 scenarios, reflecting each distinct
period of 10 consecutive years between 1926 through 2002, and the value as an
annuity of someone who works a full career is projected over the next 41 years under
36 scenarios, reflecting each distinct period of 41 consecutive years between 1926
through 2002.
Accounts Invested in Funds that Track the S&P 500. Figures 1
through 4 show the projected values of the annuities produced by individual accounts
as a proportion of the Social Security benefits promised under current law if the
accounts were invested in a fund that tracks the S&P 500 (minus a 1% annual
administrative fee) for periods of 10, 20, 30 and 41 years. The annuities shown are
those that would be paid under a fixed rate of return on long-term U.S. government
bonds prevailing at the end of the selected illustrative period.20 For example, Figure
1 shows what proportion of Social Security would be replaced by an annuity bearing
a fixed rate of interest for a worker who contributed to an individual account for 10
years. If economic conditions in 2003-2012 were the same as those that occurred in
1965 through 1974, the proportion would be about 2%. If economic conditions were
the same as those that occurred in 1989 through 1998, the proportion would be about
9%. For results presented in table form, see Tables 1 through 4 in the Appendix.
20As would be done if the account were annuitized under the rules applicable to the federal
TSP.

CRS-10
Figure 1. 10-Year Accumulation
Value of Annuities as a Proportion of Social Security Benefits for
Workers Contributing 2% of Pay Into Individual Accounts for 10 Years
(Account Invested in S&P 500, Annuity at Fixed Interest Rate)
P e r ce nt
1 0
Wo rk e r A l w a y s E a rn ed S ca le d A v e ra g e Wa g e
a n d R etires a t A g e 6 2
9
8
7
A ccou n t I n ve s te d in S & P 500
6
5
4
3
2
1
E co n o my p erfo rms a s it d id b eg in n in g in :
0
1926
1931
1936
1941
1946
1951
1956
1961
1966
1971
1976
1981
1986
1991
N ot e: A ccount is convert ed t o a fixed life annuit y at dat e of ret irement based on t he
p revailing rat e of int erest on long-t erm U .S. bonds.

CRS-11
Figure 2. 20-Year Accumulation
Value of Annuities as a Proportion of Social Security Benefits for
Workers Contributing 2% of Pay Into Individual Accounts for 20 Years
(Account Invested in S&P 500, Annuity at Fixed Interest Rate
Pe rce n t
4 0
W o rk e r A l w a y s E a rn e d S c a l e d A v e ra g e W a g e
a n d R e t i re s a t A g e 6 2
3 5
3 0
2 5
A c c o un t I nv e s te d in S& P 5 0 0
2 0
1 5
1 0
5
E co n o m y p erf o rm s a s it d id b eg in n in g in :
0
1926
1931
1936
1941
1946
1951
1956
1961
1966
1971
1976
1981
N o t e : A c c o u n t is c o n v e rt e d t o a fixe d life a n n u it y a t d a t e o f re t ire me n t b a s e d o n t h e
p re v a ilin g ra t e o f in t e re s t o n lo n g -t e rm U .S . b o n d s .

CRS-12
Figure 3. 30-Year Accumulation
Value of Annuities as a Proportion of Social Security Benefits for
Workers Contributing 2% of Pay Into Individual Accounts for 30 Years
(Account Invested in S&P 500, Annuity at Fixed Interest Rate)
Pe rce n t
8 0
W o rk e r A l w a y s E a rn e d S c a l e d A v e ra g e W a g e
a n d R e t i re s a t A g e 6 2
7 0
6 0
5 0
A c c o u nt I nv e s te d in S & P 5 0 0
4 0
3 0
2 0
1 0
E co n o m y p erf o rm s a s it d id b eg in n in g in :
0
1926
1929
1932
1935
1938
1941
1944
1947
1950
1953
1956
1959
1962
1965
1968
1971
N o t e : A c c o u n t is c o n v e rt e d t o a fixe d life a n n u it y a t d a t e o f re t ire me n t b a s e d o n t h e
p re v a ilin g ra t e o f in t e re s t o n lo n g -t e rm U .S . b o n d s .

CRS-13
Figure 4. 41-Year Accumulation
Value of Annuities as a Proportion of Social Security Benefits for
Workers Contributing 2% of Pay Into Individual Accounts for 41 Years
(Account Invested in S&P 500, Annuity at Fixed Interest Rate)
Pe rce n t
1 0 0
W o rk e r A l w a y s E a rn e d S c a l e d A v e ra g e W a g e
a n d R e t i re s a t A g e 6 2
9 0
8 0
7 0
A c c o u nt I nv e s te d in S & P 5 0 0
6 0
5 0
4 0
3 0
2 0
1 0
E co n o m y p erf o rm s a s it d id b eg in n in g in :
0
1926
1928
1930
1932
1934
1936
1938
1940
1942
1944
1946
1948
1950
1952
1954
1956
1958
1960
1962
N o t e : A c c o u n t is c o n v e rt e d t o a fixe d life a n n u it y a t d a t e o f re t ire me n t b a s e d o n t h e
p re v a ilin g ra t e o f in t e re s t o n lo n g -t e rm U .S . b o n d s .

CRS-14
As the charts show, there are wide variations in the annuities produced under
different economic conditions.21 The greatest disparity occurs for someone retiring
in 2023, where the annuity that correlates to the 20-year period 1980 through 1999
is seven times larger than the annuity that correlates to the 20-year period 1955
through 1974. The maximum disparities in the 10, 30, and 41 year periods are
factors of 5.4, 5.3, and 4.3, respectively.
It should be noted that by definition the maximum disparities occur only once
in the various time periods. For example, for a worker who retires in 2013 (and thus
paid into an individual account for 10 years), the maximum disparity occurs only
when two of the 68 different eras are compared. More importantly to potential
investors, in this illustration the probability of getting as little as 1.8% or as much as
9.7% of one’s Social Security replaced by an individual account is only one in 68.
Statistically, it is more meaningful that 25% of the time the replacement factor was
less than 3.2% and 25% of the time it was more than 7.2%. The average, or mean,
value over these 10-year periods was 5.0%. (For a full discussion of these statistical
measures, and tables that show them for the values shown in each of the figures, see
Tables and Summary Statistics in the Appendix.)
Effect of Fixed Interest Rate on Degree of Variability. The variability
in the proportion of Social Security benefits provided by an individual account in
Figures 1 through 4 is affected not only by the value of the amount in the account at
retirement, but also by the rate of interest prevailing on the date of retirement.
Theoretically, there would be less volatility if the interest rate were not fixed at the
time of retirement but were adjusted to current market conditions.22 Figures 5
through 8 show what proportion of Social Security benefits would be provided by an
individual account if the interest rate applicable to the annuity were adjusted each
year to reflect the current rate of a portfolio of long-term U.S. government bonds.23
For example, Figure 5 shows what proportion of Social Security would be replaced
by an annuity bearing either a fixed or variable rate of interest for a worker who
contributed to an individual account for 10 years. If the economic conditions were
the same as occurred in 1946 through 1955, the proportion would be about 6% under
a variable interest rate, and about 7% under a fixed rate. If the economic conditions
were the same as occurred in 1971 through 1980, the proportion would be about 8%
under a variable interest rate, and about 6% under a fixed rate. (For results and
statistical measures presented in table form, see Tables 5 through 8 in the Appendix.)
21The range of disparities would probably be wider if inter-year variability were included
(i.e., if peaks and troughs during each of the years were modeled).
22For example, TIAA – CREF offers annuities whose income is based on money market
accounts.
23This is how the present values of Social Security benefits are calculated, so this would be
the same as comparing the present values of the individual accounts and the Social Security
benefits using the same discount rate. Thus, the change in values expressed in Figures 5-8
are the same as would be shown if one were illustrating only the variations in the values of
the amounts accumulated in the individual accounts. If one wishes, these illustrations can
be used to focus just on the variability of individual account balances at the time of
retirement.

CRS-15
Figure 5. 10-Year Accumulation
Value of Annuities as a Proportion of Social Security Benefits for
Workers Contributing 2% of Pay Into Individual Accounts for 10 Years
(Annuity at Fixed and Variable Interest Rates)
Acco u n t In ve s te d i n S & P 5 0 0 , An n u i ty a t F i x e d In te re s t Ra te
Acco u n t In ve s te d i n S & P 5 0 0 , An n u i ty a t Va ri a bl e In te re s t Ra te
Pe rce n t
1 0
Wo rk e r A lw a y s E a rn e d S c a le d A v e ra g e Wa g e
a n d R e tire s a t A g e 6 2
9
8
7
6
5
4
3
2
1
E co n o m y p erf o rm s a s it d id b eg in n in g in :
0
1926
1931
1936
1941
1946
1951
1956
1961
1966
1971
1976
1981
1986
1991

CRS-16
Figure 6. 20-Year Accumulation
Value of Annuities as a Proportion of Social Security Benefits for
Workers Contributing 2% of Pay Into Individual Accounts for 20 Years
(Annuity at Fixed and Variable Interest Rates)
Acco u n t In ve s te d i n S & P 5 0 0 , A n n u i ty a t F i x e d In te re s t Ra te
Acco u n t In ve s te d i n S & P 5 0 0 , A n n u i ty a t Va ri a bl e In te re s t Ra te
Pe rce n t
4 5
Wo rk e r A lw a y s E a rn e d S c a le d A v e ra g e Wa g e
a n d R e tire s a t A g e 6 2
4 0
3 5
3 0
2 5
2 0
1 5
1 0
5
E co n o m y p erf o rm s a s it d id b eg in n in g in :
0
1926
1931
1936
1941
1946
1951
1956
1961
1966
1971
1976
1981

CRS-17
Figure 7. 30-Year Accumulation
Value of Annuities as a Proportion of Social Security Benefits for
Workers Contributing 2% of Pay Into Individual Accounts for 30 Years
(Annuity at Fixed and Variable Interest Rates)
A c c o u n t In ve s t e d i n S & P 5 0 0 , A n n u i t y a t Fi x e d In t e r e s t R a t e
A c c o u n t In ve s t e d i n S & P 5 0 0 , A n n u i t y a t V a r i a b l e In t e r e s t R a t e
Pe rce n t
8 0
Wo rk e r A lw a y s E a rn e d S c a le d A v e ra g e Wa g e
a n d R e tire s a t A g e 6 2
7 0
6 0
5 0
4 0
3 0
2 0
1 0
E co n o m y p erf o rm s a s it d id b eg in n in g in :
0
1926
1929
1932
1935
1938
1941
1944
1947
1950
1953
1956
1959
1962
1965
1968
1971

CRS-18
Figure 8. 41-Year Accumulation
Value of Annuities as a Proportion of Social Security Benefits for
Workers Contributing 2% of Pay Into Individual Accounts for 41 Years
(Annuity at Fixed and Variable Interest Rates)
A c c o u n t In ve s t e d i n S & P 5 0 0 , A n n u i t y a t Fi x e d In t e r e s t R a t e
A c c o u n t In ve s t e d i n S & P 5 0 0 , A n n u i t y a t V a r i a b l e In t e r e s t R a t e
1 0 0
Pe rce n t
Wo rk e r A lw a y s E a rn e d S c a le d A v e ra g e Wa g e
a n d R e tire s a t A g e 6 2
9 0
8 0
7 0
6 0
5 0
4 0
3 0
2 0
1 0
E co n o m y p erf o rm s a s it d id b eg in n in g in :
0
1926
1928
1930
1932
1934
1936
1938
1940
1942
1944
1946
1948
1950
1952
1954
1956
1958
1960
1962

CRS-19
As Figures 5 through 8 show, factoring out the effect of a fixed rate of interest
in most cases does reduce the volatility in annuities, especially over longer periods.
The maximum disparities in the 10, 20, 30, and 41-year periods are factors of 5.4,
6.2, 4.8, and 3.9, respectively, compared to the maximum disparities produced by a
fixed interest rate of 5.4, 6.9, 5.3, and 4.3, respectively. The figures also show that
a variable interest rate can produce annuities that are higher or lower than the
annuities produced by a fixed interest rate. Sometimes these differences can be
substantial. For example, if the economic conditions prevailing in the period 1940-
1980 were to recur over the next 41 years, a worker with a full career would receive
an annuity under a fixed rate of interest that would be 33% higher than under a
variable rate.
Effect of Adding Bonds to Investment Mix. Most Social Security reform
proposals that feature individual accounts allow contributions to the accounts to be
invested in several funds, including ones that invest in whole or in part in high grade
corporate or U.S. bonds. Some funds are a mixture of broad-based stock index funds
and high-grade corporate or U.S. bonds. One prominent proposal mandates that all
contributions go to a fund that is invested 60% in stocks and 40% in high-grade
corporate bonds.24 The question arises of how such an investment strategy would
affect the size and volatility of individual account annuities. Following are figures
that reflect the same circumstances as those featured in Figures 1 through 4, but also
include the annuities produced by investments in a fund that is 60% invested in
stocks that track the S&P 500 and 40% invested in long-term U.S. bonds. For
example, Figure 9 shows that, if economic conditions were the same as those that
occurred in 1946 through 1955, the proportion of Social Security replaced would be
about 4% under the 60/40 mix, and about 6% under the S&P 500 rate. If economic
conditions were the same as those that occurred in 1969 through 1978, the proportion
under the 60/40 mix and the S&P 500 rate would be about the same.
24The Chairman of the House Ways and Means Committee and its Social Security
Subcommittee Chairman proposed such a measure in the 106th Congress. Representative
Shaw, Chairman of the Ways and Means Social Security Subcommittee, proposed this
approach in H.R. 3497 in the 107th Congress. In H.R. 75 in the 108th Congress, he proposes
offering three investment choices: a mix of 60% stocks/ 40% bonds, a mix of 65% stocks/
35% bonds, and a mix of 70% stocks/ 30% bonds.

CRS-20
Figure 9. 10-Year Accumulation
Value of Annuities as a Proportion of Social Security Benefits for
Workers Contributing 2% of Pay Into Individual Accounts for 10 Years
(Account Invested Entirely in Stocks and in 60% Stocks, 40% Bonds)
A cco u n t In ve s te d En ti re l y i n S & P 5 0 0
A cco u n t In ve s te d i n 6 0 % S & P 5 0 0 , 4 0 % B o n ds
P e r c e n t
1 0
Wo rk e r A lw a y s E a rn e d S c a le d A v e ra g e Wa g e
a n d R e tire s a t A g e 6 2
9
8
7
6
5
4
3
2
1
E c o n o m y p e rfo rm s a s i t d i d b e g i n n i n g i n :
0
1926
1931
1936
1941
1946
1951
1956
1961
1966
1971
1976
1981
1986
1991
N o t e : A c c o u n t is c o n v e rt e d t o a fixe d life a n n u it y a t d a t e o f re t ire me n t b a s e d o n t h e
p re v a ilin g ra t e o f in t e re s t o n lo n g -t e rm U .S . b o n d s .

CRS-21
Figure 10. 20-Year Accumulation
Value of Annuities as a Proportion of Social Security Benefits for
Workers Contributing 2% of Pay Into Individual Accounts for 20 Years
(Account Invested Entirely in Stocks and in 60% Stocks, 40% Bonds)
Accou n t In ve s te d En ti re l y i n S & P 500
Accou n t In ve s te d i n 60% S & P 500, 40% B on ds
Pe rce n t
4 5
W or k er Alw ays Earned Scaled Av erage W age
and Retires at Age 62
4 0
3 5
3 0
2 5
2 0
1 5
1 0
5
E conom y perf orm s as it did beginning in:
0
1926
1931
1936
1941
1946
1951
1956
1961
1966
1971
1976
1981
N ot e: A ccount is convert ed t o a fixed life annuit y at dat e of ret irement based on t he
p revailing rat e of int erest on long-t erm U .S. bonds.

CRS-22
Figure 11. 30-Year Accumulation
Value of Annuities as a Proportion of Social Security Benefits for
Workers Contributing 2% of Pay Into Individual Accounts for 30 Years
(Account Invested Entirely in Stocks and in 60% Stocks, 40% Bonds)
Acco u n t In ve s te d En ti re l y i n S & P 5 0 0
Acco u n t In ve s te d i n 6 0 % S & P 5 0 0 , 4 0 % B o n ds
8 0
P e rc e n t
W o r k er A lw a ys E a r n ed S ca led A v er a g e W a g e
a n d R etir es a t A g e 6 2
7 0
6 0
5 0
4 0
3 0
2 0
1 0
E co n o m y p erf o rm s a s it d id b eg in n in g in :
0
1926
1929
1932
1935
1938
1941
1944
1947
1950
1953
1956
1959
1962
1965
1968
1971
N o t e : A c c o u n t is c o n v e rt e d t o a fixe d life a n n u it y a t d a t e o f re t ire me n t b a s e d o n t h e
p re v a ilin g ra t e o f in t e re s t o n lo n g -t e rm U .S . b o n d s .

CRS-23
Figure 12. 41-Year Accumulation
Value of Annuities as a Proportion of Social Security Benefits for
Workers Contributing 2% of Pay Into Individual Accounts for 41 Years
(Account Invested Entirely in Stocks and in 60% Stocks, 40% Bonds)
Acco u n t In ve s te d En ti re l y i n S & P 5 0 0
Acco u n t In ve s te d i n 6 0 % S & P 5 0 0 , 4 0 % B o n ds
P e rc e nt
1 0 0
W o r k er A lw a ys E a r n ed S ca led A v er a g e W a g e
a n d R etir es a t A g e 6 2
9 0
8 0
7 0
6 0
5 0
4 0
3 0
2 0
1 0
E co n o m y p erf o rm s a s it d id b eg in n in g in :
0
1926
1928
1930
1932
1934
1936
1938
1940
1942
1944
1946
1948
1950
1952
1954
1956
1958
1960
1962
N o t e : A c c o u n t is c o n v e rt e d t o a fixe d life a n n u it y a t d a t e o f re t ire me n t b a s e d o n t h e
p re v a ilin g ra t e o f in t e re s t o n lo n g -t e rm U .S . b o n d s .

CRS-24
As these charts show, investing in a mixture of stocks and bonds would produce
less volatility in the annuities. The greatest disparity occurs for someone retiring in
2013, where the annuity that correlates to the 10-year period 1980 through 1989 is
3.9 times larger than the annuity that correlates to the 10-year period 1932 through
1941. The maximum disparities in the 20, 30, and 41-year periods are factors of 3.7,
3.0, and 2.7, respectively. (For results and statistical measures presented in table
form, see Tables 9 through 12 in the Appendix.) The comparable numbers under the
all-stock scenario are 5.4, 6.9, 5.3 and 4.3, respectively.
However, while the addition of bonds to the investment portfolio helps to limit
the range of disparities in the annuity values, in the vast majority of cases modeled
here these values are lower than those produced by the all-stock portfolio. In the 11
cases (out of 211) where the annuity value is higher under the 60/40 mix, 10 occur
when the worker retires in 2013, reflecting the shorter period (10 years) in which the
individual account has been in effect. For the periods where the individual account
has been in effect for 30 or 41 years, in all cases the annuities reflecting the all-stock
portfolio are higher than those reflecting the 60/40 mix of stocks and bonds. For a
full-career worker, the least difference between the annuities that an all-stock
portfolio and the 60/40 mix provided was 49%, while the most was 140%.
Analysis
These modeling results illustrate that the value of individual accounts would be
highly sensitive not only to fluctuations in investment performance during the
accumulation phase but, if converted to an annuity, to the rate of interest prevailing
at the time of retirement as well. However, while isolating the effect of a fixed rate
of interest produces differences of up to 33% in the value of an annuity provided by
an individual account, it does not produce that much of a difference in the extremes
of the range of variability. While the addition of bonds to the investment portfolio
helps to limit the range of disparities in the annuity values, over any appreciable
period of time these values are lower than those produced by the all-stock portfolio.
Conclusions
The analysis in this report is meant to contribute to evolving concepts of Social
Security reform and should be of interest to both sides of the debate. For those who
oppose individual accounts, especially if the accounts are placed in higher-risk
investments, the potential volatility in account values may support concerns that such
unpredictability and uneven treatment of recipients are alien to the concept of social
insurance, which has always been expressed as providing a predictable and assured
“floor of protection” that backstops other types of retirement income. They may
focus particularly on the problems in the transition period, when individual accounts
would not have long to build up and as this modeling has illustrated would be even
more volatile. They also may focus on instances where workers who only have 10
or 20 years to build up their account could receive less from an individual account
than the Social Security benefit it would supplement or replace. Even after the
transition period to a new system were complete, the problem of small accumulations

CRS-25
and short-term volatility would apply to younger workers who become disabled or
die with dependent survivors.
Those who support individual accounts may focus on the level of income that
individual accounts could provide relative to Social Security. They may view these
modeling results as supporting their contention that investing a portion of the payroll
tax mostly in a broad spectrum of stocks would generally produce an annuity that
would be significantly higher than the Social Security benefit it would supplement
or replace. Stated another way, advocates maintain that Social Security’s inherent
rate of return on the contributions to the system are far lower than provided by
investments in private financial markets. (For an annualized year-by-year long-range
rate of return on the S&P 500, see Table 13 in the Appendix.) To them, the potential
for a large degree of volatility would be overcome by the likelihood that the values
would be higher than what Social Security could provide. Their argument might run
as follows: the long-range cost of retired worker benefits to the Social Security
program is projected to be 10.47% of taxable payroll.25 Thus, 2% of pay can be said
to pay for 19.1% (2/10.47) of the promised Social Security benefit of a retired
worker. Under this formulation, for workers who contribute to individual accounts
throughout their careers, the value of the account can be said to be greater than that
provided by Social Security if the portion of Social Security it replaces is greater than
19.1%. Under the circumstances modeled in this report, for full-career workers the
mean, or average, proportion of Social Security replaced under the three investment
scenarios (49.6%, 50.5%, and 26.2%)26 would be considerably more than 19.1%. On
a year-by-year basis, under the all-stock scenarios there are no instances when a full-
career worker would receive an annuity from an individual account that is less than
19.1% of the Social Security benefits promised under current law. Under the 60/40
mix scenario, there are eight instances (out of 37, or 22% of the time) when a full-
career worker would receive an annuity from an individual account that is less than
19.1% of the Social Security benefits promised under current law.
Regardless of one’s perspective on this “moneysworth” issue, the public may
have problems with annuitizing individual accounts. Some may not want
annuitization at all, preferring instead an approach through which they would receive
the accumulated amount as a lump sum to spend when they wish, or to leave to their
heirs. This could be especially true for those who do not expect to live long in
retirement. The idea of mandatory annuitization could also prove unpopular because
one of the selling points some individual-account proponents use is that “it’s your
money, with your name on it, not just a government promise.” This carries the
connotation that the account is “owned” by the individual and therefore carries with
it property rights, which implies that the owner of the account should be able to do
with it what he or she wants. This concern might be alleviated to a degree if features
were added such as a cash refund option, which, should the annuitant die early,
would pay the estate the amount by which the balance in the account at the time of
25Figure provided by Alice Wade, Deputy Chief Actuary of the Social Security
Administration.
26See Summary Statistics in the Appendix.

CRS-26
annuitization exceeds the amount paid out.27 However, choosing such an option
would lower the monthly amount of the annuity while the annuitant is alive. Another
option could be to allow workers to receive a lump sum distribution if the balance in
the account exceeds a minimum threshold, such as an amount sufficient to provide
income at the poverty level or the retiree’s previous standard of living.28 Also, a
schedule of maximum periodic withdrawals, regulated in a manner similar to the
rules that currently apply to IRAs, could be considered.29
If annuitization were voluntary, the concern that people could outlive the assets
in their account because of poor or unlucky financial management, inflation, or
underestimation of their life span, would remain. The government might experience
additional costs if people exhausted their accounts because they then might qualify
for government needs-based assistance. It has been suggested that some people
might “game the system” by deliberately spending down their accounts.30 Another
concern is that voluntary annuitization would carry the risk of adverse selection,
meaning that people would choose to annuitize their accounts only if it were in their
best interest to do so and would thus drive up the costs of the annuity. For example,
private sector experience suggests that people who choose to annuitize on average
live longer than the general population.31 Moreover, if unisex mortality tables were
used, because women tend to live longer than men it would be rational for men to
avoid annuitizing and for women to seek it.
Whether annuitization were mandatory or voluntary, the public might react
negatively when they learn that the value of their annuity can vary substantially
depending on the timing of their retirement. In this regard, proposals that mandate
annuitization under a fixed rate of interest, as would happen under proposals that
apply the federal TSP rules, may not be seen as the best model. If the rate of return
on the annuity were not fixed, as occurs under variable annuities, then the subsequent
adjustments in the annuity could compensate for unlucky circumstances at the time
of annuitization, but future annuity payments would be volatile (and they periodically
could decline in value). Allowing people to postpone annuitization also could
compensate for unfortunate timing, but only the better-off may be able to afford to
27The federal TSP offers such an option.
28This approach was recommended by the President’s Commission to strengthen Social
Security in its December 2001 report. It should be noted that there would be costs in
administering such a “means test,” which might lower annuity benefit levels. Also, if there
is no periodic adjustment to the annuity for inflation, over time the annuity will provide an
increasingly smaller proportion of the poverty level or previous standard of living.
29Such rules regulate the minimum amount of periodic withdrawals after age 62, whereas
here the schedule would regulate the maximum amount that could be withdrawn per period.
Under this scenario, it is unclear if the balance in the account would ever be fully
withdrawn, because under the IRA rules, the period over which the account is disbursed is
readjusted annually to reflect the remaining life expectancy of the annuitant. For a lengthy
discussion of annuitization issues, see “Social Security Privatization and the Annuities
Market.” Congressional Budget Office. February 1998, cited previously.
30Ibid., p.22.
31Ibid., p.17.

CRS-27
forego the income from the account. Furthermore, retirees would have to guess
whether they would do better (or worse) if they choose to wait to annuitize. “Timing
the market” is difficult, even for professional financial managers. However, there are
methods that might alleviate the issue of timing. One would be to “ladder”
annuitization, meaning that converting the accounts to annuities could be spread over
several years. This would be similar in concept to a practice often used by bond
holders, in which the risk of interest rate fluctuations is minimized by purchasing
bonds on a periodic basis. Said another way, by converting only part of the account
each year, annuitization would be “averaged-in.” The “downside” of this
arrangement would be that for several years the annuitant could not be sure what his
eventual retirement income would be. Also, annuity providers, who already may be
reluctant to administer small accounts, might oppose administering the even smaller
and more numerous accounts that periodic annuitization would produce.
An option that addresses two problems – annuitizing at a fixed interest rate and
protecting retirees from inflation – would be to invest the accumulated account at
retirement in inflation-indexed government bonds. Since 1997 the U.S. Treasury has
issued securities (“I-bonds”) that bear an interest rate that is adjusted to a set
percentage above the inflation rate. Theoretically using I-bonds to set the rate for an
annuity would provide less variation in the value of annuities. It also is argued that
if the accounts were invested in these accounts then indexing the annuity to inflation
would be easier to do because the increase in the monthly payments and the rate of
interest earned by the investments on which the annuity is based would both be
adjusted proportionately. However, I-bonds apparently still are sensitive to the
influences of market demand and fiscal and monetary policy. Every 6 months the
Treasury sets the amount that newly-issued bonds will earn above inflation. In the
past 3 years these rates have varied between 1.6% and 3.6%, illustrating that they too
have a degree of volatility.
Moreover, a massive investment in government I-bonds to finance annuities
could raise concerns that the resources they represent are not “real.” Critics of the
current Social Security trust funds have long maintained that, because they are
comprised exclusively of U.S. government securities, they represent merely a
promise by the government to raise revenue when it comes time to redeem the
securities. From this viewpoint, the securities are “IOUs, ” not real resources. They
also are part of the national debt and can be affected by restrictions to the debt
ceiling. As I-bonds are U.S. securities, they could be subject to the same criticism.
Put another way, the government would be under the obligation to come up with the
resources to redeem the securities as workers retire, and would then have to raise
taxes, cut other programs, or borrow from the public, an arrangement no different
from the current financing arrangement and subject to the same criticisms.
A natural question is how other public retirement systems, at home and abroad,
have dealt with the issues involved with the disbursement of individual accounts.
Chile and the United Kingdom are often cited as examples, and each currently offers
inflation-indexed annuities. (For a complete discussion of these and other systems,
see the Appendix.)
Finally, how the individual accounts would be financed has an important
bearing on the degree of these concerns. There are two basic approaches for funding

CRS-28
personal accounts. One assumes the money for the new accounts would come from
additional contributions from workers or from the government on their behalf. The
other assumes that workers would be allowed to divert part of their existing Social
Security taxes to the accounts. The first is typically referred to as an “add-on”
approach, the second as a “carve-out” approach. Under the carve-out approach it is
generally recognized that the loss of revenue caused by using existing Social Security
taxes to fund personal accounts would worsen the program’s financing problems.
Unless a new source of revenue were created for Social Security, its benefits would
have to be reduced to compensate for the lower receipts, and this reduction would
have to be in addition to that needed to remedy the already existing long-range
financing imbalance.
Thus, absent mitigating measures, the carve-out approach is seen as a “double
whammy” on Social Security benefits. Because the “floor of protection” that Social
Security provides would be substantially less than under current law, in large part due
to the diversion of payroll taxes to individual accounts, it is argued that it would be
even more imperative that the portion of Social Security that the individual account
replaces should be close in character to Social Security (i.e., an inflation-indexed
annuity).
It is probable that the salience of nearly all these issues would be mitigated if
individual accounts were financed by an add-on approach. Not only would the
account be labeled as a “supplement” rather than a “replacement,” but, because it
would not directly cause a reduction of the Social Security benefit, it also would be
viewed as similar to an IRA or a 401(k) account that builds on Social Security.
Because workers currently can use these forms of retirement income pretty much as
they wish, the concerns about protection against inflation, people outliving their
assets, variability, etc. probably would be softened if the accounts were viewed this
way. However, securing the resources that would be necessary to finance individual
accounts from outside the Social Security system would have its own set of issues.
Cautionary Notes
The purpose of this report is to illustrate the possible effects of the economy on
individual accounts and their annuities in relationship to Social Security. In doing
so, it uses past economic performance as a proxy for what might happen in the future.
The reader should recognize that how the economy performed in the past is no
guarantee that it will perform that way in the future, and therefore the results shown
in this paper should not be considered determinative of what will actually happen if
individual accounts are implemented.
For purposes of showing personal account accumulations, the analysis assumes
a 41-year career, based on a person starting work at age 21 and earning a wage that
is “scaled” to reflect typical work patterns and will eventually lead to a Social
Security benefit that is equal to that of a worker who always earned an average wage.
This stylized scenario is a more refined version of that often used in analyzing Social
Security benefits. However, such a scenario should not be construed to necessarily
represent a “typical” worker, because of variabilities in unemployment, the ages of

CRS-29
entry and exit from the work force, career earnings patterns, etc. These variations are
particularly important in calculating the value of personal account accumulations.
There are several issues that are not addressed in this report. First, the benefits
that occur in the aggregate because of higher rates of return (e.g., investment in
equities) are not necessarily restricted to individual accounts. Such gains might also
be achieved if the same dollar amounts were directly invested by the trust funds
(although gains might be distributed differently).32 Second, there would be transition
costs associated with moving from a pay-as-you-go system to a pre-funded system.
These costs could be financed only from higher taxes, lower spending on other
government programs, or increased borrowing. Borrowing from the public could
raise interest payments for the federal government and crowd out private
investment.33 These factors could lower the return that could be expected to accrue
to the accounts.
Additional cautions regarding assumptions made in preparing the report are
discussed at length in the Appendix.
32See CRS Report RL30571, Social Security Reform: The Issue of Individual Versus
Collective Investment for Retirement, by David Koitz, and RL30189, Investing Social
Security Funds in the Stock Market: an Economic Perspective, by Brian Cashell.
33For a further discussion, see CRS RL31498, Social Security Reform: Economic Issues,
Savings, by Jane Gravelle and Marc Labonte.

CRS-30
Appendix
Methods and Basic Assumptions Used to Prepare Report
Over the years the Congressional Research Service has developed a computer
model that does case simulations of individual worker’s Social Security benefits.
Computations of benefits are based on current law, and the underlying economic and
demographic projections used are those contained in the intermediate or “best guess”
assumptions of the latest report of the Social Security Board of Trustees. The
computations can be expressed in current and constant dollars or as a percentage of
pre-retirement earnings that Social Security benefits replace.
The model can be modified to reflect the features of various reform plans so the
effect on present and future recipients’ benefits and taxes can be evaluated, including
the value and effect of personal accounts. It also can be modified to show the effect
of differences in personal characteristics (e.g., in their relative earnings levels), in
underlying economic and demographic assumptions, or to reflect alternative
assumptions about how much of future Social Security benefits can be paid given the
system’s projected financing problems.
A crucial measure in comparing the value of benefits over a lifetime is the
computation of present values. The model does so by constructing streams of benefit
payments that accrue at a specified rate of interest and include cost of living
adjustments for benefits. These streams are adjusted by the probability that a
particular worker will survive to each year. These probabilities are based on the
mortality assumptions contained in cohort life tables on which the intermediate
demographic projections are based. Cohort, rather than period, life tables are used
because they reflect expected improvements in mortality.
For lifetime benefit computations (expressed as the present value of benefits at
age 62), the probability of survival in each year after retirement is based on the
Trustees’ projections of mortality for a recipient’s age cohort.34 The Trustees project
mortality rates separately for men and women. The illustrations shown in this report
are based on “unisex” mortality assumptions that reflect a blending of the Trustees’
separate assumptions for men and women. This methodology was chosen largely
because the proposals illustrated here envision an annuity system that mandates the
use of unisex assumptions in computing annuities (in recognition that gender-based
projections of life expectancy are not permitted in determining annuities payable
under employer plans, e.g., 401(k) plans.). Also, because men and women with the
same circumstances (i.e., earnings history, age, and time of retirement) receive the
same level of benefits for as long as they live, Social Security implicitly annuitizes
on a unisex basis.
34“Discounting” is used in present value analysis to reflect the value of money over time.
For example, to compute the value of lifetime Social Security benefits, the calculation
involves determining the amount of money that would have to be invested at a given rate of
interest at the time of retirement so that the principal and accumulated interest would be just
enough to fund a recipient’s benefit given his or her probability of survival in each
subsequent year.

CRS-31
The rate of return for accounts invested in a fund indexed to the S&P 500
market assumes dividends would be reinvested. It is assumed that administrative
costs and related management fees would lower the rate of return by 1 percentage
point per year.35 It is assumed that individual accounts would be free from taxation
during the accumulation phase, and would be taxed similarly to Social Security in the
payout phase.
How Disbursements From Individual Accounts Are Handled
Under Other Systems
In Chile, often cited as the pioneer for countries replacing a pay-as-you-go
government defined benefit program with individual accounts, a worker at retirement
can elect to: (1) receive monthly payments from his or her account that are
determined by the family members’ life expectancy and the balance remaining in the
account (and which are adjusted annually); (2) buy an inflation-indexed annuity from
a private insurance company; or (3) combine these two options. Retirement is
allowed before attaining retirement age (age 65 for men, 60 for women) if the funds
are sufficient to provide adequate benefits, both in terms of monetary amounts and
the rate of replacement of former earnings. Lump sum withdrawals are allowed if the
amount remaining is sufficient to purchase a minimum annuity. While the amount
of the pension is based on the value of the worker’s contribution plus interest, the
government guarantees (i.e., it bears the cost of) a minimum benefit (85% of the
current minimum wage). The government also guarantees (and bears the cost of) a
minimum rate of return.
In the United Kingdom, often cited as a model for how an older democratic
industrial country can switch to a partially privatized system, workers may opt out
of the earnings-related tier of the state plan into a defined contribution personal
pension plan. Upon retirement a worker may withdraw up to 25% of assets as a tax-
free lump sum. Otherwise, the assets must be used to purchase an annuity from a life
insurance company which pays the retiree an agreed-upon income for the rest of his
or her life. Until recently, the value of the annuities varied widely because they
depended on the value of the accumulated amount in the pension and the cost of
annuities at the time of retirement. An extreme example occurred in 1987 when a
worker retiring on October 23 would have received a pension that was 30% lower
than if he or she had retired a week earlier. However, to help avoid this situation the
rules were recently changed to allow retirees to defer the purchase of an annuity, but
they must do so by the time they attain age 75. Both flat-payment annuities and
35This adjustment is a crude proxy for the costs to administer the account. “Index fund”
investments usually have low costs, perhaps a mere fraction of a percent, whereas actively
traded, personally-directed accounts might have considerable transaction charges. The
federal TSP “C fund,” mentioned several times in this report as a model that is widely used
in reform proposals, has an administrative cost that is 0.08% of fund assets. However,
administering the TSP is aided greatly by the nature of the federal centralized payroll
systems and its stable workforce and the fact that there are no costs borne by the fund
associated with advertizing and attracting customers. It is likely that collecting contributions
from all the nation’s employers, including many “Mom and Pop”operations, and maintaining
records for all the nation’s workers, including potentially very small accounts, would drive
up administrative costs of Social Security individual accounts considerably.

CRS-32
annuities indexed to inflation are available. Insurance companies are able to
inflation-index annuities in large part because the U.K. government issues inflation-
indexed bonds.
Forced annuitization has been heavily criticized for locking people into rates of
return that they regard as too low. Interest rates in the late 80s and early 90s were in
double digits, but now are around 6%. In response to this criticism, a bill was
introduced recently in the House of Commons that would require people to buy
annuities only to provide income equal to the state support threshold; any balance in
the account above that requirement could be spent as the retiree wishes.
In the United States, examples of an individual account alternative can be found
in state and local government plans. Under pre-1983 law, state and local
governments could opt out of Social Security. In particular, three counties in Texas
have been noted for their defined contribution system that replaced Social Security
in 1981.36 These plans allow retiring employees to receive their benefits as a lump
sum or as an annuity. The annuities are not indexed to inflation, but workers may
choose a graded annuity.
Tables and Summary Statistics
Tables 1 through 12 show the year-be-year values that are reflected in Figures
1 through 12. They show the value of the annuities, expressed as a proportion of
Social Security benefits, that could be purchased at age 62 with the proceeds of
individual accounts, assuming that the accounts were invested in particular ways and
that the economy performed as it did over specific periods in the past. Each table
contains at least 37 and as many as 68 values, depending on the length of the
investment period being illustrated.
Accompanying each table are summary statistics that provide measures of the
range of results and the extent to which the results tend to cluster near the center –
or average value – of the distribution. They indicate how frequently the annuity
value of the individual accounts was substantially more or less than the average value
that was achieved under each scenario. Six summary statistics are shown for each
table: the minimum and maximum values of the annuities, the mean and the median
values of the annuities, and the values of the annuities at the 25th percentile and the
75th percentile. All of the annuity values are expressed as a percentage of the
worker’s Social Security benefit.
The minimum and the maximum define the full range of the results. By
definition, no simulation produced an account with an annuity value that was lower
than the minimum or higher than the maximum. The mean is a simple arithmetic
average. It is calculated by adding up the value of the individual accounts in each
table (expressed as a percentage of the Social Security benefit) and then dividing this
total by the number of accounts. As a measure of a central tendency – which is what
an “average” represents – the mean can sometimes be deceptive because it may be
36For an explanation and analysis of these plans see GAO Report HEHS-00-31, Social
Security Reform: Experience of the Alternate Plans in Texas.

CRS-33
biased by a relatively small number of unusually high or low values. The median is
another measure of central tendency that is more representative of the population
because it is not biased by unusually high or low values. The median is calculated
by ordering all of the observed values from highest to lowest and finding the value
that lies exactly at the midpoint of the distribution. The median falls at the 50th
percentile. One half of all observed values are greater than the median and half are
less than the median. Likewise, 25% of all observations fall below the 25th percentile
and 75% fall below the 75th percentile. Thus, the interval between the 25th percentile
and the 75th percentile defines the middle half of any distribution. Only one-fourth
of all observed values fall below this interval and one-fourth fall above it.

CRS-34
Table 1. Value of Annuities as a Proportion of Social Security
Benefits for Workers* Paying Into Individual Accounts for 10 Years
(Account Invested in S&P 500, Annuity at Fixed Interest Rate)
Value of annuity as
Economy performs
% of Social
Economy performs
Value of annuity as
as it did in:
Security
as it did in:
% of Social Security
1926-1935
4.6%
1960-1969
3.5%
1927-1936
5.3
1961-1970
2.8
1928-1937
2.9
1962-1971
2.9
1929-1938
3.1
1963-1972
3.4
1930-1939
2.9
1964-1973
2.8
1931-1940
2.3
1965-1974
2.1
1932-1941
1.8
1966-1975
2.8
1933-1942
2.0
1967-1976
3.3
1934-1943
2.2
1968-1977
3.3
1935-1944
2.3
1969-1978
3.8
1936-1945
2.7
1970-1979
5.3
1937-1946
2.7
1971-1980
8.2
1938-1947
3.2
1972-1981
7.3
1939-1948
3.1
1973-1982
7.4
1940-1949
3.1
1974-1983
9.5
1941-1950
3.9
1975-1984
8.2
1942-1951
4.7
1976-1985
7.5
1943-1952
4.7
1977-1986
8.3
1944-1953
3.9
1978-1987
7.9
1945-1954
5.0
1979-1988
7.8
1946-1955
5.9
1980-1989
9.7
1947-1936
5.4
1981-1990
7.9
1948-1937
4.1
1982-1991
8.3
1949-1958
5.0
1983-1992
7.0
1950-1959
4.8
1984-1993
7.2
1951-1960
4.5
1985-1994
6.4
1952-1961
4.7
1986-1995
7.5
1953-1962
3.6
1987-1996
8.1
1954-1963
3.7
1988-1997
8.3
1955-1964
3.7
1989-1998
9.0
1956-1965
4.0
1990-1999
9.6
1957-1966
3.2
1991-2000
6.6
1958-1967
3.6
1992-2001
4.8
1959-1968
4.0
1993-2002
3.4
*Retiring at age 62 in 2013
Illustrations based on workers who have typical work patterns that produce the Social Security benefit of
someone who always earned an average wage and who contribute 2% of pay for 10 years to individual
accounts that earn the same rate of return as the S&P 500 minus a 1% administrative fee. Illustrations
assume that the amount accumulated in the account is converted to a fixed life annuity based on the
prevailing rate of interest on long-term U.S. bonds.

CRS-35
Statistical measure
Percentage of Social Security benefit
Mean (Average)
5.0%
Minimum
1.8
25th Percentile
3.2
50th Percentile
4.3
75th Percentile
7.2
Maximum
9.7
Ratio of Maximum to Minimum
5.4 to 1

CRS-36
Table 2. Value of Annuities as a Proportion of Social Security
Benefits for Workers* Paying Into Individual Accounts for 20 Years
(Account Invested in S&P 500, Annuity at Fixed Interest Rate)
Value of annuity as
Economy performs
% of Social
Economy performs
Value of annuity as
as it did in:
Security
as it did in:
% of Social Security
1926-1945
6.7%
1955-1974
5.7%
1927-1946
6.1
1956-1975
7.2
1928-1947
7.4
1957-1976
8.1
1929-1948
7.0
1958-1977
7.7
1930-1949
7.2
1959-1978
8.4
1931-1950
8.7
1960-1979
11.3
1932-1951
10.6
1961-1980
17.3
1933-1952
10.9
1962-1981
15.2
1934-1953
9.4
1963-1982
15.0
1935-1954
12.8
1964-1983
19.1
1936-1955
15.9
1965-1984
17.0
1937-1956
15.4
1966-1985
16.6
1938-1957
12.3
1967-1986
18.9
1939-1958
16.3
1968-1987
18.8
1940-1959
17.4
1969-1988
19.8
1941-1960
17.5
1970-1989
26.3
1942-1961
19.2
1971-1990
22.8
1943-1962
15.2
1972-1991
25.5
1944-1963
16.1
1973-1992
23.1
1945-1964
16.2
1974-1993
25.6
1946-1965
17.1
1975-1994
23.6
1947-1966
13.6
1976-1995
28.4
1948-1967
15.2
1977-1996
31.3
1949-1968
16.1
1978-1997
33.1
1950-1969
13.2
1979-1998
37.0
1951-1970
10.1
1980-1999
39.8
1952-1971
9.8
1981-2000
27.9
1953-1972
10.9
1982-2001
20.4
1954-1973
8.5
1983-2002
14.2
*Retiring at age 62 in 2023.
Illustrations based on workers who have typical work patterns that produce the Social Security benefit of
someone who always earned an average wage and who contribute 2% of pay for 20 years to individual
accounts that earn the same rate of return as the S&P 500 minus a 1% administrative fee. Illustrations
assume that the amount accumulated in the account is converted to a fixed life annuity based on the
prevailing rate of interest on long-term U.S. bonds.

CRS-37
Statistical measure
Percentage of Social Security benefit
Mean (Average)
16.3%
Minimum
5.7
25th Percentile
10.2
50th Percentile
15.7
75th Percentile
19.2
Maximum
39.8
Ratio of Maximum to Minimum
7.0 to 1

CRS-38
Table 3. Value of Annuities as a Proportion of Social Security
Benefits for Workers* Paying Into Individual Accounts for 30 Years
(Account Invested in S&P 500, Annuity at Fixed Interest Rate)
Value of annuity as
Economy performs
% of Social
Economy performs
Value of annuity as
as it did in:
Security
as it did in:
% of Social Security
1926-1955
25.2%
1950-1979
22.7%
1927-1956
24.3
1951-1980
33.1
1928-1957
19.3
1952-1981
27.6
1929-1958
25.7
1953-1982
26.1
1930-1959
27.7
1954-1983
31.7
1931-1960
28.2
1955-1984
27.3
1932-1961
31.6
1956-1985
25.8
1933-1962
25.7
1957-1986
29.0
1934-1963
28.6
1958-1987
28.2
1935-1964
30.0
1959-1988
29.2
1936-1965
33.2
1960-1989
38.5
1937-1966
27.5
1961-1990
33.4
1938-1967
32.1
1962-1991
37.4
1939-1968
36.3
1963-1992
33.8
1940-1969
31.7
1964-1993
37.7
1941-1970
25.2
1965-1994
36.0
1942-1971
25.1
1966-1995
45.4
1943-1972
27.9
1967-1996
51.8
1944-1973
21.9
1968-1997
56.7
1945-1974
14.4
1969-1998
66.9
1946-1975
17.6
1970-1999
76.3
1947-1976
19.1
1971-2000
56.0
1948-1977
17.4
1972-2001
43.1
1949-1978
18.0
1973-2002
28.7
*Retiring at age 62 in 2033
Illustrations based on workers who have typical work patterns that produce the Social Security benefit of
someone who always earned an average wage and who contribute 2% of pay for 30 years to individual
accounts that earn the same rate of return as the S&P 500 minus a 1% administrative fee. Illustrations
assume that the amount accumulated in the account is converted to a fixed life annuity based on the
prevailing rate of interest on long-term U.S. bonds.
Statistical measure
Percentage of Social Security benefit
Mean (Average)
32.0%
Minimum
14.4
25th Percentile
25.6
50th Percentile
28.7
75th Percentile
34.4
Maximum
76.3
Ratio of Maximum to Minimum
5.3 to 1

CRS-39
Table 4. Value of Annuities as a Proportion of Social Security
Benefits for Workers* Paying Into Individual Accounts for 41 Years
(Account Invested in S&P 500, Annuity at Fixed Interest Rate)
Economy performs as it did in:
Value of annuity as % of Social Security
1926-1966
37.0%
1927-1967
44.0
1928-1968
50.0
1929-1969
44.0
1930-1970
35.3
1931-1971
35.9
1932-1972
41.2
1933-1973
33.4
1934-1974
22.8
1935-1975
28.5
1936-1976
31.3
1937-1977
29.5
1938-1978
31.5
1939-1979
41.0
1940-1980
61.0
1941-1981
51.0
1942-1982
47.6
1943-1983
57.4
1944-1984
48.2
1945-1985
44.0
1946-1986
47.9
1947-1987
45.7
1948-1988
47.9
1949-1989
58.4
1950-1990
48.9
1951-1991
53.2
1952-1992
46.8
1953-1993
51.5
1954-1994
48.1
1955-1995
59.6
1956-1996
67.4
1957-1997
73.2
1958-1998
85.8
1959-1999
97.8
1960-2000
71.9
1961-2001
55.6
1962-2002
41.2
*Retiring at age 62 in 2044
Illustrations based on workers who have typical work patterns that produce the Social Security benefit of
someone who always earned an average wage and who contribute 2% of pay for 41 years to individual
accounts that earn the same rate of return as the S&P 500 minus a 1% administrative fee. Illustrations
assume that the amount accumulated in the account is converted to a fixed life annuity based on the
prevailing rate of interest on long-term U.S. bonds.

CRS-40
Statistical measure
Percentage of Social Security benefit
Mean (Average)
49.1%
Minimum
22.8
25th Percentile
41.0
50th Percentile
47.9
75th Percentile
55.6
Maximum
97.8
Ratio of Maximum to Minimum
4.3 to 1

CRS-41
Table 5. Value of Annuities as a Proportion of Social Security
Benefits for Workers* Paying Into Individual Accounts for 10 Years
(Account Invested in S&P 500, Annuity at Variable Interest Rate)
Value of annuity as
Economy performs
% of Social
Economy performs
Value of annuity as
as it did in:
Security
as it did in:
% of Social Security
1926-1935
4.3%
1960-1969
3.5%
1927-1936
4.9
1961-1970
3.4
1928-1937
2.7
1962-1971
3.7
1929-1938
3.1
1963-1972
4.0
1930-1939
2.8
1964-1973
3.1
1931-1940
2.3
1965-1974
2.3
1932-1941
1.8
1966-1975
3.3
1933-1942
2.1
1967-1976
4.0
1934-1943
2.4
1968-1977
3.6
1935-1944
2.5
1969-1978
3.9
1936-1945
3.0
1970-1979
4.7
1937-1946
2.8
1971-1980
6.3
1938-1947
3.6
1972-1981
5.8
1939-1948
3.4
1973-1982
6.5
1940-1949
3.7
1974-1983
7.4
1941-1950
4.5
1975-1984
7.0
1942-1951
5.5
1976-1985
8.0
1943-1952
5.5
1977-1986
8.2
1944-1953
4.7
1978-1987
7.8
1945-1954
6.1
1979-1988
7.8
1946-1955
7.2
1980-1989
8.8
1947-1936
6.8
1981-1990
7.6
1948-1937
5.1
1982-1991
8.5
1949-1958
6.5
1983-1992
7.7
1950-1959
6.2
1984-1993
7.2
1951-1960
5.3
1985-1994
6.4
1952-1961
5.7
1986-1995
7.6
1953-1962
4.5
1987-1996
8.1
1954-1963
4.6
1988-1997
9.1
1955-1964
4.7
1989-1998
9.6
1956-1965
4.7
1990-1999
9.8
1957-1966
3.9
1991-2000
7.5
1958-1967
4.3
1992-2001
5.6
1959-1968
4.2
1993-2002
4.2
*Retiring at age 62 in 2013.
Illustrations based on workers who have typical work patterns that produce the Social Security benefit of
someone who always earned an average wage and who contribute 2% of pay for 10 years to individual
accounts that earn the same rate of return as the S&P 500 minus a 1% administrative fee. Illustrations
compare the present values of individual accounts and Social Security using the same discount rate of yearly
returns of newly-issued U.S. government long-range bonds.

CRS-42
Statistical measure
Percentage of Social Security benefit
Mean (Average)
5.3%
Minimum
1.8
25th Percentile
3.6
50th Percentile
4.7
75th Percentile
7.1
Maximum
9.8
Ratio of Maximum to Minimum
5.3 to 1

CRS-43
Table 6. Value of Annuities as a Proportion of Social Security
Benefits for Workers* Paying Into Individual Accounts for 20 Years
(Account Invested in S&P 500, Annuity at Variable Interest Rate)
Value of annuity as
Economy performs
% of Social
Economy performs
Value of annuity as
as it did in:
Security
as it did in:
% of Social Security
1926-1945
7.5%
1955-1974
6.5%
1927-1946
6.7
1956-1975
8.6
1928-1947
8.2
1957-1976
9.8
1929-1948
7.0
1958-1977
7.7
1930-1949
8.3
1959-1978
8.4
1931-1950
10.2
1960-1979
10.1
1932-1951
12.4
1961-1980
13.2
1933-1952
12.8
1962-1981
12.0
1934-1953
11.4
1963-1982
13.2
1935-1954
15.9
1964-1983
14.9
1936-1955
19.7
1965-1984
14.6
1937-1956
19.6
1966-1985
17.5
1938-1957
16.0
1967-1986
18.7
1939-1958
21.6
1968-1987
18.5
1940-1959
22.8
1969-1988
19.7
1941-1960
20.7
1970-1989
24.0
1942-1961
23.4
1971-1990
21.7
1943-1962
18.9
1972-1991
26.0
1944-1963
20.1
1973-1992
25.6
1945-1964
20.6
1974-1993
25.3
1946-1965
20.4
1975-1994
23.5
1947-1966
16.8
1976-1995
28.8
1948-1967
18.0
1977-1996
31.5
1949-1968
17.2
1978-1997
36.5
1950-1969
13.4
1979-1998
39.5
1951-1970
12.2
1980-1999
40.6
1952-1971
12.3
1981-2000
31.6
1953-1972
12.8
1982-2001
23.6
1954-1973
9.3
1983-2002
17.5
*Retiring at age 62 in 2023
Illustrations based on workers who have typical work patterns that produce the Social Security benefit of
someone who always earned an average wage and who contribute 2% of pay for 20 years to individual
accounts that earn the same rate of return as the S&P 500 minus a 1% administrative fee. Illustrations
compare the present values of individual accounts and Social Security using the same discount rate of yearly
returns of newly-issued U.S. government long-range bonds.

CRS-44
Statistical measure
Percentage of Social Security benefit
Mean (Average)
17.7%
Minimum
6.5
25th Percentile
12.1
50th Percentile
17.4
75th Percentile
21.7
Maximum
40.6
Ratio of Maximum to Minimum
6.3 to 1

CRS-45
Table 7. Value of Annuities as a Proportion of Social Security
Benefits for Workers* Paying Into Individual Accounts for 30 Years
(Account Invested in S&P 500, Annuity at Variable Interest Rate)
Value of annuity as
Economy performs
% of Social
Economy performs
Value of annuity as
as it did in:
Security
as it did in:
% of Social Security
1926-1955
32.0%
1950-1979
20.2%
1927-1956
31.3
1951-1980
25.0
1928-1957
25.3
1952-1981
21.6
1929-1958
34.5
1953-1982
22.7
1930-1959
36.6
1954-1983
24.6
1931-1960
33.7
1955-1984
23.2
1932-1961
38.7
1956-1985
27.2
1933-1962
32.3
1957-1986
28.6
1934-1963
35.9
1958-1987
27.7
1935-1964
38.7
1959-1988
29.0
1936-1965
39.8
1960-1989
35.1
1937-1966
34.0
1961-1990
31.7
1938-1967
38.2
1962-1991
38.0
1939-1968
38.9
1963-1992
37.5
1940-1969
32.4
1964-1993
37.3
1941-1970
30.8
1965-1994
35.8
1942-1971
31.6
1966-1995
46.0
1943-1972
32.9
1967-1996
52.0
1944-1973
24.0
1968-1997
62.6
1945-1974
16.3
1969-1998
71.4
1946-1975
20.9
1970-1999
77.8
1947-1976
23.1
1971-2000
63.6
1948-1977
19.1
1972-2001
50.2
1949-1978
18.5
1973-2002
39.5
*Retiring at age 62 in 2033
Illustrations based on workers who have typical work patterns that produce the Social Security benefit of
someone who always earned an average wage and who contribute 2% of pay for 30 years to individual
accounts that earn the same rate of return as the S&P 500 minus a 1% administrative fee. Illustrations
compare the present values of individual accounts and Social Security using the same discount rate of yearly
returns of newly-issued U.S. government long-range bonds.

CRS-46
Statistical measure
Percentage of Social Security benefit
Mean (Average)
34.6%
Minimum
16.3
25th Percentile
25.2
50th Percentile
32.7
75th Percentile
38.2
Maximum
77.8
Ratio of Maximum to Minimum
4.8 to 1

CRS-47
Table 8. Value of Annuities as a Proportion of Social Security
Benefits for Workers* Paying Into Individual Accounts for 41 Years
(Account Invested in S&P 500, Annuity at Variable Interest Rate)
Economy performs as it did in:
Value of annuity as % of Social Security
1926-1966
46.6%
1927-1967
52.9
1928-1968
53.8
1929-1969
45.1
1930-1970
43.3
1931-1971
45.5
1932-1972
48.9
1933-1973
36.8
1934-1974
25.9
1935-1975
33.8
1936-1976
38.0
1937-1977
32.4
1938-1978
32.3
1939-1979
36.3
1940-1980
45.7
1941-1981
39.6
1942-1982
41.3
1943-1983
44.1
1944-1984
40.8
1945-1985
46.2
1946-1986
47.1
1947-1987
44.7
1948-1988
45.4
1949-1989
53.0
1950-1990
46.4
1951-1991
53.9
1952-1992
52.1
1953-1993
50.9
1954-1994
47.8
1955-1995
60.3
1956-1996
67.6
1957-1997
80.9
1958-1998
91.8
1959-1999
99.8
1960-2000
82.0
1961-2001
64.9
1962-2002
51.4
*Retiring at age 62 in 2044
Illustrations based on workers who have typical work patterns that produce the Social Security benefit of
someone who always earned an average wage and who contribute 2% of pay for 41 years to individual
accounts that earn the same rate of return as the S&P 500 minus a 1% administrative fee. Illustrations
compare the present values of individual accounts and Social Security using the discount rate of yearly
returns of new-issue U.S. government long-range bonds.

CRS-48
Statistical measure
Percentage of Social Security benefit
Mean (Average)
50.5%
Minimum
25.9
25th Percentile
41.2
50th Percentile
46.3
75th Percentile
53.2
Maximum
99.8
Ratio of Maximum to Minimum
3.8 to 1

CRS-49
Table 9. Value of Annuities as a Proportion of Social Security
Benefits for Workers* Paying Into Individual Accounts for 10 Years
(Investment in 60% Stocks/40% Bonds)
Value of annuity as
Economy performs
% of Social
Economy performs
Value of annuity as
as it did in:
Security
as it did in:
% of Social Security
1926-1935
4.8%
1960-1969
3.3%
1927-1936
5.0
1961-1970
2.7
1928-1937
3.3
1962-1971
2.8
1929-1938
3.1
1963-1972
3.1
1930-1939
2.9
1964-1973
2.9
1931-1940
2.3
1965-1974
2.4
1932-1941
2.0
1966-1975
2.9
1933-1942
2.1
1967-1976
3.2
1934-1943
2.2
1968-1977
3.4
1935-1944
2.1
1969-1978
3.8
1936-1945
2.3
1970-1979
5.0
1937-1946
2.3
1971-1980
7.2
1938-1947
2.9
1972-1981
6.7
1939-1948
2.8
1973-1982
6.4
1940-1949
2.8
1974-1983
7.8
1941-1950
3.2
1975-1984
6.8
1942-1951
3.7
1976-1985
6.0
1943-1952
3.6
1977-1986
6.4
1944-1953
3.2
1978-1987
6.3
1945-1954
3.7
1979-1988
6.1
1946-1955
4.1
1980-1989
7.3
1947-1936
3.9
1981-1990
6.4
1948-1937
3.2
1982-1991
6.4
1949-1958
3.7
1983-1992
5.5
1950-1959
3.7
1984-1993
5.8
1951-1960
3.7
1985-1994
5.5
1952-1961
3.7
1986-1995
6.0
1953-1962
3.8
1987-1996
6.3
1954-1963
3.2
1988-1997
6.1
1955-1964
3.2
1989-1998
6.4
1956-1965
3.4
1990-1999
6.7
1957-1966
2.9
1991-2000
5.1
1958-1967
3.2
1992-2001
4.1
1959-1968
3.5
1993-2002
2.7
*Retiring at age 62 in 2013.
Illustrations based on workers who have typical work patterns that produce the Social Security benefit of
someone who always earned an average wage and who contribute 2% of pay for 10 years to individual
accounts. Sixty percent of the individual accounts earn the same rate of return as the S&P 500, minus a 1%
administrative fee, and 40% of the individual accounts earns the government long-term bond rate.
Illustrations assume that the amount accumulated in the account is converted to a fixed life annuity based
on the prevailing rate of interest on long-term U.S. bonds.

CRS-50
Statistical measure
Percentage of Social Security benefit
Mean (Average)
4.2%
Minimum
2.0
25th Percentile
2.9
50th Percentile
3.7
75th Percentile
5.9
Maximum
7.8
Ratio of Maximum to Minimum
3.7 to 1

CRS-51
Table 10. Value of Annuities as a Proportion of Social Security
Benefits for Workers* Paying Into Individual Accounts for 20 Years
(Investment in 60% Stocks/40% Bonds)
Value of annuity as
Economy performs
% of Social
Economy performs
Value of annuity as
as it did in:
Security
as it did in:
% of Social Security
1926-1945
5.9%
1955-1974
5.9%
1927-1946
5.6
1956-1975
6.9
1928-1947
6.7
1957-1976
7.3
1929-1948
6.2
1958-1977
7.4
1930-1949
6.1
1959-1978
8.1
1931-1950
6.7
1960-1979
10.5
1932-1951
7.6
1961-1980
14.8
1933-1952
7.6
1962-1981
13.6
1934-1953
6.9
1963-1982
12.8
1935-1954
8.2
1964-1983
15.4
1936-1955
9.5
1965-1984
13.8
1937-1956
9.2
1966-1985
12.4
1938-1957
8.0
1967-1986
13.6
1939-1958
9.6
1968-1987
13.6
1940-1959
10.2
1969-1988
13.9
1941-1960
10.6
1970-1989
17.0
1942-1961
11.2
1971-1990
15.5
1943-1962
9.7
1972-1991
16.1
1944-1963
10.0
1973-1992
14.6
1945-1964
10.0
1974-1993
16.1
1946-1965
10.6
1975-1994
15.4
1947-1966
9.2
1976-1995
17.3
1948-1967
10.0
1977-1996
18.4
1949-1968
10.8
1978-1997
18.2
1950-1969
9.8
1979-1998
19.5
1951-1970
7.8
1980-1999
20.6
1952-1971
7.6
1981-2000
15.9
1953-1972
8.3
1982-2001
12.9
1954-1973
7.4
1983-2002
8.4
*Retiring at age 62 in 2023
Illustrations based on workers who have typical work patterns that produce the Social Security benefit of
someone who always earned an average wage and who contribute 2% of pay for 20 years to individual
accounts. Sixty percent of the individual accounts earn the same rate of return as the S&P 500, minus a 1%
administrative fee, and 40% of the individual accounts earns the government long-term bond rate.
Illustrations assume that the amount accumulated in the account is converted to a fixed life annuity based
on the prevailing rate of interest on long-term U.S. bonds.

CRS-52
Statistical measure
Percentage of Social Security benefit
Mean (Average)
11.1%
Minimum
5.6
25th Percentile
7.7
50th Percentile
10.0
75th Percentile
13.9
Maximum
20.6
Ratio of Maximum to Minimum
3.7 to 1

CRS-53
Table 11. Value of Annuities as a Proportion of Social Security
Benefits for Workers* Paying Into Individual Accounts for 30 Years
(Investment in 60% Stocks/40% Bonds)
Economy
Value of annuity as
performs as it did
% of Social
Economy performs
Value of annuity as
in:
Security
as it did in:
% of Social Security
1926-1955
14.8%
1950-1979
17.5%
1927-1956
14.2
1951-1980
24.2
1928-1957
12.1
1952-1981
21.6
1929-1958
14.3
1953-1982
19.7
1930-1959
14.9
1954-1983
23.2
1931-1960
15.5
1955-1984
20.3
1932-1961
16.3
1956-1985
17.9
1933-1962
14.4
1957-1986
19.4
1934-1963
15.3
1958-1987
19.1
1935-1964
15.7
1959-1988
19.3
1936-1965
17.0
1960-1989
23.6
1937-1966
15.2
1961-1990
21.4
1938-1967
16.8
1962-1991
22.3
1939-1968
18.9
1963-1992
20.1
1940-1969
17.8
1964-1993
22.3
1941-1970
14.5
1965-1994
21.8
1942-1971
14.4
1966-1995
25.1
1943-1972
15.8
1967-1996
27.2
1944-1973
14.0
1968-1997
27.5
1945-1974
11.2
1969-1998
30.3
1946-1975
12.7
1970-1999
33.1
1947-1976
13.3
1971-2000
26.1
1948-1977
13.1
1972-2001
21.9
1949-1978
14.0
1973-2002
14.6
*Retiring at age 62 in 2033
Illustrations based on workers who have typical work patterns that produce the Social Security benefit of
someone who always earned an average wage and who contribute 2% of pay for 30 years to individual
accounts. Sixty percent of the individual accounts earn the same rate of return as the S&P 500, minus a 1%
administrative fee, and 40% of the individual accounts earns the government long-term bond rate.
Illustrations assume that the amount accumulated in the account is converted to a fixed life annuity based
on the prevailing rate of interest on long-term U.S. bonds.

CRS-54
Statistical measure
Percentage of Social Security benefit
Mean (Average)
18.7%
Minimum
11.2
25th Percentile
14.6
50th Percentile
17.7
75th Percentile
21.8
Maximum
33.1
Ratio of Maximum to Minimum
3.0 to 1

CRS-55
Table 12. Value of Annuities as a Proportion of Social Security
Benefits for Workers* Paying Into Individual Accounts for 41 Years
(Investment in 60% Stocks/40% Bonds)
Economy performs as it did in:
Annuity as % of Social Security
1926-1966
19.7%
1927-1967
22.2
1928-1968
24.7
1929-1969
23.2
1930-1970
18.8
1931-1971
18.7
1932-1972
20.8
1933-1973
18.7
1934-1974
15.3
1935-1975
17.5
1936-1976
18.4
1937-1977
18.5
1938-1978
20.1
1939-1979
25.5
1940-1980
35.5
1941-1981
31.8
1942-1982
28.9
1943-1983
33.9
1944-1984
29.3
1945-1985
25.2
1946-1986
27.0
1947-1987
26.4
1948-1988
26.2
1949-1989
31.6
1950-1990
28.1
1951-1991
28.9
1952-1992
25.8
1953-1993
28.4
1954-1994
27.4
1955-1995
31.2
1956-1996
33.7
1957-1997
33.9
1958-1998
37.3
1959-1999
40.7
1960-2000
32.1
1961-2001
27.0
1962-2002
17.9
*Retiring at age 62 in 2044
Illustrations based on workers who have typical work patterns that produce the Social Security benefit of
someone who always earned an average wage and who contribute 2% of pay for 41 years to individual
accounts. Sixty percent of the individual accounts earn the same rate of return as the S&P 500, minus a 1%
administrative fee, and 40% of the individual accounts earns the government long-term bond rate.
Illustrations assume that the amount accumulated in the account is converted to a fixed life annuity based
on the prevailing rate of interest on long-term U.S. bonds.

CRS-56
Statistical measure
Percentage of Social Security benefit
Mean (Average)
26.2%
Minimum
15.3
25th Percentile
20.6
50th Percentile
26.7
75th Percentile
31.3
Maximum
40.7
Ratio of Maximum to Minimum
2.7 to 1

CRS-57
Table 13. S&P 500 Annualized Total Real Rates of Return
Over 41-Year Periods, 1926-2002
1926-1966
8.18%
1927-1967
7.57%
1928-1968
6.76%
1929-1969
6.62%
1930-1970
7.25%
1931-1971
8.74%
1932-1972
9.04%
1933-1973
7.19%
1934-1974
6.25%
1935-1975
5.92%
1936-1976
5.59%
1937-1977
6.44%
1938-1978
5.68%
1939-1979
5.81%
1940-1980
6.50%
1941-1981
6.56%
1942-1982
6.70%
1943-1983
6.71%
1944-1984
6.36%
1945-1985
6.23%
1946-1986
7.06%
1947-1987
7.32%
1948-1988
7.67%
1949-1989
7.80%
1950-1990
6.88%
1951-1991
7.10%
1952-1992
6.84%
1953-1993
7.07%
1954-1994
5.95%
1955-1995
5.98%
1956-1996
6.32%
1957-1997
7.40%
1958-1998
7.15%
1959-1999
7.32%
1960-2000
7.01%
1961-2001
6.05%
1962-2002
5.61%
Note: Excludes administrative fees. “Annualized” means that the principal at the beginning of the
period compounds over time with dividends reinvested.