NCPA - National Center for Policy Analysis


May 24, 2005

Every measure to shore up Social Security's $11 trillion unfunded liability that does not include personal retirement accounts (PRAs) can be boiled down to fewer benefits, more taxes, or a combination of the two, says Pete du Pont, board chairman of the National Center for Policy Analysis. Consequently, he says, PRAs offer the only chance for younger workers to gain anything from Social Security reform.

PRAs will allow participants to invest part of what they already pay in payroll taxes, and in exchange, the accounts replace part of their government/taxpayer-funded benefits. This creates a combined benefit.

For example, say Social Security promises a worker $1,500 a month at retirement:

  • Under a leading reform plan, if the worker opts to divert 4 percentage points of his payroll tax into his personal account, he agrees to give up $300 a month in traditional government funded benefits.
  • If his personal account earns 3 percent a year, this worker breaks even and earns $1,500 a month in retirement.

If the worker's investment earns a higher return, he earns a higher monthly benefit. The Social Security Administration says workers who invest 50 percent in stocks and 50 percent in bonds can expect a return of about 4.6 percent.

Over time, as workers with personal accounts retire, Social Security's obligations are reduced. Thus, Bush-style personal accounts alone will reduce Social Security's costs by about 10 to 15 percent over the next 75 years, and more than 20 percent beyond the 75-year horizon, says du Pont.

Of course, Bush's approach includes more than just adoption of PRAs. He has also noted the need for other measures, like curbing the growth of future government-provided benefits.

Adopting both aspects, reducing government's burden and including PRAs will provide benefits comparable to what the system now promises and more than it actually can afford, says du Pont.

Source: Pete du Pont, "Essential element of reform," Washington Times, May 23, 2005.


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