NCPA - National Center for Policy Analysis

Building Equity in a House as a Substitute for Social Security

March 19, 2013

The Social Security system takes 6.2 percent from of an employee's compensation and another 6.2 percent on behalf of the employer. The government feeds the contribution into a system that has liabilities much greater than its assets. Instead of paying a portion of one's salary directly to the government, Social Security tax payments would be more beneficial if individuals were allows to save for retirement by building equity in a house, says Alex Pollock, a resident fellow at the American Enterprise Institute.

American politicians and policies have long touted the benefits of home ownership, particularly to young people who are starting families and careers. Unfortunately, Social Security takes a large portion of a young person's income and makes it more difficult to save for a proper down payment.

Consider a 24 year old who intends to be married with children at age 30 and to purchase a home at age 32, making $40,000 with modest annual raises of 3 percent:

  • In the eight years between the ages of 24 and 32, this person will have paid more than $44,000 in Social Security taxes from his or her income.
  • If this $44,000 were put in a special restricted savings account for accumulating a down payment on a house, even with interest rates of less than 1 percent, this individual would have about $45,000, which would provide a sound 20 percent down payment on a house costing $225,000.
  • If this individual gets an 80 percent traditional mortgage that amortizes in 30 years, the house would be owned free and clear at the age of 62, and over the 30 years annual price increases of 3 percent a year would make the house worth about $546,000.

If until age 35 individuals were given the option to either pay 12.4 percent to Social Security or have this amount deposited in a restricted savings account for a down payment on a house, Americans would have the opportunity to create retirement savings in the form of equity in property as opposed to earning benefits from a troubled government pension program.

A system like this would offer more choice to Americans building families and reduce the impact of the government pushing risky low down payments.

Source: Alex Pollock, "A Better Way for Young Families to Build a Future: Social Security Taxes vs. Down Payments," The American, March 9, 2013.


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