NCPA - National Center for Policy Analysis

Principles Of Social Security Reform

July 26, 1999

As we consider reform of Social Security, analysts say we should keep in mind that the system's trust funds are merely an accounting mechanism and do not provide real assets to pay any retirees' benefits. Under our pay-as-you go system, taxes paid by today's workers are immediately spent on benefits. According to the Social Security trustees' latest projections, as baby boomers retire, the tax rate needed to fund benefits will keep growing.

  • By 2045, when today's 20-year-olds reach retirement age - which at that time will be 67 - the government will need 17.4 percent of workers' wages to pay projected benefits, under the trustees' intermediate assumptions.
  • Add in the amount needed to fund Medicare and other health care programs for the elderly and we will need a total tax rate of more than 31 percent. 
  • Under the trustees' pessimistic assumptions, by 2045 the government will need 21.7 percent of workers' wages to pay projected Social Security benefits and more than twice that figure for elderly health care.
  • The total tax rate needed will be more than 48 percent of workers' incomes. 

A solution to Social Security's problems requires investment in income-earning assets, say analysts. In an analysis for the NCPA, Texas A&M University economist Andrew J. Rettenmaier found that with an annual contribution of 4.2 percent of wages, a personal retirement account invested in a balanced portfolio could replace Social Security benefits.

Despite the difficulties of reform, the government can guarantee benefits for individual retirees. Two reform proposals -- by Sen. Phil Gramm (R-Texas) and by Reps. Bill Archer (R-Texas) and Clay Shaw (R-Fla.) -- explicitly guarantee that all retirees will receive a pension at least as great as the one promised under the current system.

Source: John C. Goodman (NCPA President) and Joe Barnett (Policy Analyst), "Five Principles of Social Security Reform," Brief Analysis No. 302, July 26, 1999, National Center for Policy Analysis, 12770 Coit Rd., Suite 800, Dallas, Texas 75251, (972) 386-6272.

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