NCPA - National Center for Policy Analysis


June 20, 2005

Those who support personal retirement accounts say that self-investment and ownership would help lift up low- and moderate-income earners in a way that Social Security, for all its good, hasn't been able to do. Many think such accounts would make sense even if Social Security's financial outlook wasn't so bleak.

But because significant benefit cuts will be necessary in the decades after retiree benefits eclipse payroll tax revenue in 2017, the accounts are a critical part of helping workers get a better deal, they say.

One reason is the poor hold few assets:

  • The median family owned only $28,000 in financial assets in 2001, a Federal Reserve survey found.
  • For households whose incomes place them in the lowest 20 percent, the median was just $8,000; for all nonwhites, it was just $7,200.
  • Workers pay 6.2 percent of their wages -- up to $90,000 -- to fund retirees' Social Security benefits; economists say the real burden is twice as high because employers also pay 6.2 percent.

For low- and moderate-income workers, in particular, that leaves little extra disposable income to save and invest. For the majority who reach retirement age, the payroll taxes they've paid over their career provide an income stream to help maintain their standard of living.

For the one-in-four workers who die before retiring, Social Security offers no chance to pass on their hard-earned savings. That leaves the next generation in the same bind of having few assets and little chance to grow them.

It's not sufficient for policies to "support a level of consumption," says Michael Sherraden, director of the Center for Social Development at Washington University. "The pathway out of poverty is not through income and consumption, but through savings and accumulation."

Source: Jed Graham, "Social Security Reform Would Assist the Poor,"Investor's Business Daily, June 17, 2005.


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