NCPA - National Center for Policy Analysis

SOCIAL SECURITY REFORM FOR ECONOMIC GROWTH

April 6, 2005

One of the greatest benefits of a Social Security system based on personal accounts is that workers would never face a use-it-or-lose-it decision. They would never forego any benefits by continuing to work. They would just continue to build up wealth, providing more income when they do choose to stop working or providing a nest egg that can be left to children or a spouse at death, says Bruce Bartlett, a senior fellow with the National Center for Policy Analysis.

Consequently, personal accounts will greatly increase work by the elderly by removing penalties for doing so. New research by economists Alan Gustman and Thomas Steinmeier quantify the impact:

  • They find that adoption of something like the Social Security Commission's second option, which is very similar to what President Bush is proposing, would reduce retirement at age 62 by five percent -- a significant impact -- by encouraging more seniors to stay in the labor force.
  • One reason is that the Social Security Commission's proposal would change the indexing of initial benefits so that they would remain the same in real terms, but not rise at a faster rate than inflation, as is currently the case.
  • Consequently, if it is decided not to change the indexing formula, which most Democrats oppose, then it will substantially reduce the economic gain from reforming Social Security.

So far, there has been almost no discussion of the implications of Social Security reform for economic growth. The potential benefits, however, may be large and are an important reason to take action, says Bartlett.

Source: Bruce Bartlett, "Social Security Reform for Economic Growth," National Center for Policy Analysis, April 6, 2005; Alan L. Gustman and Thomas L. Steinmeier, "Retirement Effects of Proposals by the President?s Commission to Strengthen Social Security," Dartmouth University, March 2003.

 

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