NCPA - National Center for Policy Analysis

Securing Social Security

December 10, 1998

The current Social Security system uses today's tax revenues to pay benefits to today's retirees. Senator Phil Gramm has unveiled a plan to change Social Security to an investment-based system.

Under the Gramm plan, published as a study by the National Center for Policy Analysis, workers would place a portion of their payroll tax dollars in private investment accounts. They would own the accounts, but the money would be invested by closely regulated private professional money management funds.

The Gramm plan outlines a 40-year transition period during which the unfunded liability owed by the present system to people who have paid into it would be eliminated. When fully implemented, the new system would guarantee benefits 20 percent higher than the current system. The higher benefits would be phased in gradually, as more and more workers privately invest.

  • The first baby boomers to retire would receive almost 10 percent of their retirement income from their Social Security investment accounts and 90 percent from the current system.
  • The last baby boomers to retire would receive about 50 percent of their retirement income from their investments and about 50 percent from the current system.
  • Today's 20-year-olds with average lifetime earnings would receive 100 percent of their retirement income from their private investments and could expect to receive 20 percent more in added benefits than under the current system.
  • Individuals who have low wages or lose work time due to sickness or unemployment would have lost benefits made up out of the current system.

Three sources of funds would finance the transition to the new system: (1) projected federal budget surpluses; (2) a recapture for use by Social Security of the federal corporate income taxes that would be collected on new investments made possible by the accumulation of capital in the new Social Security accounts; and (3) redemption of 29 percent of the Social Security Trust Fund's assets.

Source: Phil Gramm, "Investment-Based Social Security: Saving Social Security for Our Parents, for Our Children, Forever," Policy Report No. 220, December 1998, National Center for Policy Analysis, 12770 Coit Rd., Suite 800, Dallas, Texas 75243, (972) 386-6272.

 

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