NCPA - National Center for Policy Analysis

Economic Advisers Analyze Social Security Accounts

February 9, 2004

The annual Economic Report of the President published today includes an analysis of adding individual retirement accounts to Social Security. It is one of three reform options proposed by a commission President Bush appointed in 2001.

Under the plan workers could contribute 4 percent of their eligible earnings, up to $1,000 a year, into a private account, from which they would draw some of their retirement income. Those workers would still receive benefits from traditional Social Security but whereas current law indexes Social Security benefit levels to wage growth, they would instead rise with the typically lower inflation rate.

The accounts eventually would reduce the burden on Social Security for future retirees' benefits, but initially would deprive the Treasury of revenue it now uses to fund the rest of the government -- the surplus of payroll tax revenues over benefits paid to today's retirees. According to the CEA:

  • The federal deficit would peak at 1.6 percent of gross domestic product in 2022.
  • The diversion of payroll taxes to the accounts would boost the national debt by 23.6 percentage points of GDP in 2036.
  • By comparison, this fiscal year's deficit is projected to be 4.5 percent of GDP and the national debt will be 38.6 percent of GDP.
  • But because the government would pay smaller Social Security benefits under this option, by the year 2076 the budget deficit would be 4.5 percent of GDP smaller and the debt 35 percent smaller than without any Social Security changes.

The report says today's budget deficits make changes more urgent because without it, future workers would have to pay taxes to cover both future retiree benefits and added interest on the national debt.

Source: Greg Ip, "Social Security Option Is Reviewed," Wall Street Journal, February 9, 2004.

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