NCPA - National Center for Policy Analysis

Benefits Of Personal Retirement Accounts

May 23, 2000

Gov. George W. Bush recently proposed supplementing traditional Social Security with personal retirement accounts in which individuals would invest a portion of their payroll taxes.

The proposal has several benefits, says economist Martin Feldstein of Harvard University, carries little risk that future retirees will receive any lower benefits and would not require a tax increase.

Assuming that 2 percentage points of the 12.4 percent Social Security tax is deposited in personal retirement accounts.

  • There would be no risk for those who are now retired, since the new system would not apply to them.
  • But for younger workers, the rate of return on personal retirement accounts would exceed the return on the Social Security trust fund -- thus traditional tax-financed benefits combined with payouts from personal retirement accounts can maintain retirement incomes for future retirees at the level now projected.
  • With corporations making greater profits due to increased national saving, and therefore paying more taxes, the trust fund would remain permanently solvent, instead of running dry in 2037.
  • Budget surpluses would be returned to taxpayers in the form of account deposits, while payroll taxes continued to fund traditional benefits.

Any risks for future retirees could be eliminated by a government guarantee that anyone who invests in the standard stock-bond portfolio would be compensated if his annuity falls below the benefits projected in current law. But future retirees would have a good chance of receiving higher retirement benefits than under the current system.

Source: Martin Feldstein (an adviser to Gov. George W. Bush), "Bush's Low-Risk Pension Reforms," New York Times, May 22, 2000.


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