Opinion Editorial | |
| Monday, August 31, 1998 | |
Social Security Reduces Private Savings |
As Congress debates Social Security reform, a key question will be what
effect it may have on economic growth. In this respect, a key factor will
be what impact reform might have on aggregate saving. Saving, of course,
is essential to growth because it finances investment in plant, equipment,
research and development, which are the foundations of higher productivity. In a recent study, the Congressional Budget Office (CBO) was critical
of a Social Security reform plan put forward by economist Martin Feldstein
of Harvard University. Feldstein would allow workers to save a portion
of their Social Security taxes in return for lower future benefits. The
main problem CBO identified is that the Feldstein plan would reduce federal
revenues by $800 billion over 10 years. Unless offset by an equal amount
of spending cuts, this revenue loss would increase the budget deficit or
reduce the surplus by a similar magnitude. The result will be to reduce
national saving by almost the full amount of the revenue loss. (Budget
surpluses add to national saving, deficits subtract from it.) However, another recent CBO study makes the important point that the
current Social Security system greatly reduces the rate of saving. The
reason is because retirement is one of the main reason why people save.
Therefore, to the extent that Social Security provides people with a retirement
income, they have less need to save. CBO reviewed a number of academic
studies and concluded that Social Security may reduce private saving by
as much as 50 percent. To get an idea of the magnitude of this impact, it is important to know
that the implicit wealth that Americans have in Social Security is very
substantial. According to Feldstein, gross Social Security wealth amounted
to more than $12 trillion in 1992 (see figure).
Net of Social Security taxes paid, it was almost $8 trillion. (In other
words, people would have had to save an additional $12 trillion to receive
a retirement income equal to what Social Security would pay them.) Thus
our nation's capital stock may be lower by $6 trillion due to Social Security. One of the great benefits of moving toward a pre-funded Social Security
system, which would be more like a private retirement plan, is that Social
Security would increase private saving rather than reducing it. Given that
the personal savings rate has virtually collapsed during the Clinton Administration,
this may be a compelling reason for reforming Social Security as soon as
possible. In 1992, the personal saving rate was 5.7 percent. Last year
it fell to just 2.1 percent and is half that rate so far this year. Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis,
August 31, 1998. For CBO analysis of the Feldstein plan http://www.cbo.gov/showdoc.cfm?index=763&sequence=0&from=7 For CBO report on Social Security and private saving http://www.cbo.gov/showdoc.cfm?index=731&from=1&sequence=0 Home | Support Us | All Issues | Social Security Debate Central | Contact Us |
