Opinion Editorial | |
| Wednesday, August 12, 1998 | |
Personal Retirement Accounts Would Increase Savings 
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On August 4, the Congressional Budget Office (CBO) released a new report
attacking a proposal by Harvard Professor Martin Feldstein for privatizing
Social Security. The Feldstein plan would allow workers to put up to two
percent of their payroll tax contribution into a personal retirement account
(PRA). At retirement, withdrawals from the account would reduce one's Social
Security benefits by 75 cents for each dollar taken out. The CBO basically believes that Feldstein's plan is a budget-buster.
It would reduce federal revenues by some $800 billion over the next ten
years, while Social Security payments would fall very little. The reason
is because it will take many years for balances in the PRAs to rise to a
significant level. In short, the revenue losses are immediate, while the
budgetary savings come only in the long-run. Of course, Prof. Feldstein recognizes that there is a short-run transition
cost that must be paid and he proposes using the federal budget surplus
to pay for it. The alternative, he believes, is that Congress and the administration
will simply spend it on projects of dubious merit. Using the surplus to
put Social Security on a sound financial footing, by contrast, would be
an investment in the long-term. Still, the CBO sees any reduction in the surplus as equivalent to an
increase in the deficit, which would reduce national saving and hence economic
growth. It does not believe that the PRAs will offset this reduction in
saving, because workers will reduce other saving as they make contributions
to the PRAs. Prof. Feldstein responds that it is inappropriate to view the budget
surplus as a net addition to national saving, as CBO does, because the surpluses
inevitably will vanish under the political pressure to cut taxes or increase
spending. Thus the real question is whether some of the surplus will be
saved in the form of PRAs or none of it will be saved. Furthermore, Feldstein believes that the CBO is too pessimistic about
the impact of PRAs on other saving. He points out that few individuals
have much in the way of liquid assets outside of their retirement accounts.
Thus they have no assets they can reduce to offset the increase in saving
in their PRAs. For this reason, Feldstein believes that the PRAs will offset
almost 100 percent of the reduction in the surplus. In short, national
saving will not fall as CBO argues. Moreover, since a large portion of PRAs will be invested in stocks that
earn a higher return than government bonds, over time national saving will
rise above what would be the case if the surplus is simply used to reduce
the national debt. Since national saving is higher in the long run under
the Feldstein plan, the size of the economy will be larger as well. Another area where the CBO downplays the impact of the Feldstein plan
is on labor supply. The CBO believes that reducing the payroll tax by two
percent will elicit little, if any, additional work effort. However, the
major effect of PRAs on labor supply will be to convert what is now a tax
on labor into a contribution that is part of one's compensation. CBO counters
that insofar as the PRAs increase private wealth, it will only encourage
workers to retire earlier. Lastly, CBO implicitly assumes that the Social Security status quo is
viable and will not require large future tax increases to pay promised benefits.
One of the virtues of the Feldstein plan, however, is that no future tax
increases are necessary. Indeed, Social Security tax rates can fall as
the economy grows. Source: Bruce Bartlett (senior fellow, National Center for Policy Analysis),
August 12, 1998. Home | Support Us | All Issues | Social Security Debate Central | Contact Us |