NCPA - National Center for Policy Analysis

Heritage Defends Social Security Calculations

December 22, 1998

Some opponents of Social Security reform claim the system's rate of return -- the value of benefits workers receive for taxes paid -- compares favorably to what they would receive if their payroll taxes were invested in stocks and bonds.

In particular, the Institute for America's Future criticized the methodology used by Heritage Foundation researchers for not taking into account the cost of the transition to private Social Security accounts. On the other hand, Heritage researchers point out that their calculations also don't include the increased payroll taxes most observers agree will be necessary to fund a growing shortfall under the current system in coming decades.

However, even if payroll taxes were increased so that part could be invested in Personal Security Accounts (PSAs), as some members of the 1994-1996 Social Security Advisory Council proposed, workers would still come out ahead.

  • For instance, a low-income single male worker born in 1955 would receive a rate of return from the current system of 2.45 percent compared to 2.46 percent under the PSA plan.
  • A low income worker born in 1973 can expect a 2.32 percent rate of return from Social Security, but would receive a 2.95 percent return if PSAs were available.
  • And a low income worker born in 2004 can expect a 1.83 percent return from Social Security, compared to 2.99 percent from a PSA.

While some workers may receive a positive rate of return from Social Security, Heritage says that a large majority of the members of a group -- up to 70 percent in the case of African- Americans -- may in fact receive negative returns from the Social Security program.

Source: William W. Beach and Gareth G. Davis, "Calculating Social Security's Rate of Return," Executive Memorandum No. 564, December 17, 1998, and "Social Security's Rate of Return: A Reply to Our Critics," December 11, 1998, Report No. 98-08, Heritage Center for Data Analysis, both Heritage Foundation, 214 Massachusetts Avenue, N.E., Washington, D.C. 20002, (202) 546- 4400.


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