Younger Americans likely winners with personal accounts

Patrick in Columbus, Ohio, writes, "I am in my late thirties and have been contributing the maximum amount to my 401(K) that has added up to $45,000. I have no bad debt, own a home, and save at least 10% of my income each month. I think that privatization of Social Security is an excellent choice for me since I can invest my contribution more wisely than the Government. Is my understanding correct or am I missing something here?"

In principle, when each American plans for her/his retirement, they can be expected to act more responsibly. Because we have a Social Security system that provides guaranteed benefits to most Americans, we do not save enough. In fact, we hardly save anything and have the dubious distinction of being somewhere at the bottom when it comes to saving.

Thus, Patrick is right that if he is in charge of his own destiny, he can plan much better for his retirement. Most Americans in his age group think like him. According to a new poll conducted by Zogby International for the Cato Institute, while just 14% of Americans believe President Bush when he says that the Social Security is in a crisis, three out of five Americans under 50 think that personal retirement savings accounts is a good idea. The opinion is driven partly by the doubts that younger Americans have that Social Security will be there for them when they retire and partly by the fact that during the last decade more younger Americans have become more comfortable with investing and trading, particularly with the availability of online brokerage trading accounts. Young Americans are also more likely to have 401(K) accounts than some baby boomers and retirees.

Adding to that is demographic/social change that is happening in America. As the family system is falling apart with an extremely high rate of divorce, single parents, and general disinterest in traditional family values, more Americans are concerned about themselves rather than caring for others. Many younger Americans simply do not appreciate the idea of paying for retirees.
But it is important to understand that personal retirement savings account do not solve the problem of either the Social Security itself or in any way guarantee that retirees will have a higher retirement income themselves. Even President Bush has admitted that the only way Social Security can be fixed is by reducing benefits by linking them to prices rather than wages (as is currently done). While many younger Americans may not appreciate the risks of stock markets, in the Zogby poll, one out of three thinks that private retirement accounts are clearly riskier. (Related articles: Personal retirement accounts may not solve Social Security problems and Retirement income expected to fall under Bush plan)

What does it mean for younger Americans?

• With our without Social Security reform, retirement benefits for most Americans will go down. However, with personal retirement savings accounts, younger Americans have higher possibility of raising their retirement incomes. (Related article: Americans highly concerned about their retirement incomes)
• Personal retirement savings account should not be seen as money to play with in the stock market. On the contrary, it should be added to the overall pool of savings that you have and basic principles of personal portfolio management applied. (Related article: Personal finance plan key to retirement planning)

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