NCPA STUDY: Investment A Better Use Of Social Security Surplus Funds Than Reducing Debt

DALLAS (January 17, 2001) -- The best use of the Social Security surplus is to invest the money in the private capital market, according to a new study released today by the National Center for Policy Analysis (NCPA). In fact, the study concludes, without investment the country will face exploding deficits or skyrocketing taxes by the middle of this century.

The study, directed by Dr. Tom Saving, a professor at Texas A&M University and director of the University's Private Enterprise Research Center, compares the two most talked about proposals for using the Social Security surplus - paying down the debt and investing in stocks and bonds. The most common proposal for investing is to allow workers to put a portion of their payroll taxes into personal retirement accounts.

"Getting out of debt is a good thing," said Saving. "But future promises to pay Social Security benefits are another type of debt; one that keeps growing year by year."

The study said that because debt reduction doesn't alter the structural problem of Social Security, by 2021 the government would have to start borrowing again. And by 2029, we would have the same level of debt as we have today. At that point, the government would have only two options: continue to borrow money or raise taxes. Specifically:

  • If today's Social Security surplus is invested, as investment funds grow, they would reduce the government's obligation to pay future benefits.
  • As a result, by 2050 the government could meet its obligations to retirees with about the same payroll tax rate we have today - 12.5 percent.
  • By contrast, without investment, by 2050 we will have either four times as much debt as we have today, or a payroll tax rate (19.6 percent) that is 57 percent higher.

"Using the surplus to reduce the federal debt would help in the short run, but not in the long run," said Dr. Saving, who is also a trustee of the Social Security and Medicare trust funds.

For complete study: