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NATIONAL CENTER FOR POLICY ANALYSIS
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Personal Retirement Accounts and Small Business

Daily Policy Digest

Social Security Issues

Wednesday, December 12, 2001

Allowing taxpayers to invest a portion of their Social Security retirement taxes would be a boon to small businesses and entrepreneurs.

One reason is that Social Security benefits are more likely to fund a larger share of the retirements of small-business owners; thus reducing the program's impending financial problems is important to their financial security. Personal accounts would dramatically improve the rate of return on payroll tax payments, thereby enhancing retirement income.

While 79 percent of mid- to large-size businesses offer employer-supported retirement benefits, far fewer smaller businesses do so.

Among businesses with 25-99 employees, the figure is 46 percent; for businesses with 10-24 employees, it is 34 percent; and for those with one to nine employees, it drops to 22 percent.

A study by the National Association for the Self-Employed found that more than three-quarters (78 percent) of its members had saved less than $100,000 for retirement even though virtually none had private-sector pensions and their median age was 46.

One alternative to personal retirement accounts is higher payroll taxes; but Social Security taxes already contribute to high marginal tax rates that discourage entrepreneurship.

Research indicates that a 5 percent increase in marginal tax rates leads to a 10.4 percent decrease in the probability of investment by sole proprietors.

With a typical 5 percent state income tax, 28 percent federal income tax and 15.3 percent in Social Security and Medicare taxes, marginal tax rates are already above 40 percent for the self-employed.

Additionally, personal retirement accounts would help small businesses by reducing the government's unfunded liabilities and increasing the pool of privately invested capital.

Source: James Morrison, "Social Security Reform Helps Small Business," Backgrounder No. 1494, October 17, 2001, Heritage Foundation.

For text
http://www.heritage.org/Research/SocialSecurity/BG1494.cfm

For more on retirement and Social Security
http://www.ncpa.org/iss/sos/

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