NCPA - National Center for Policy Analysis

Unappetizing Alternatives to Personal Retirement Accounts

February 25, 2002

Proposals to integrate personal retirement accounts (PRAs) into the current Social Security program have received much attention over the past several years. PRAs would allow individual workers to invest their payroll taxes in stock and bond funds, and thereby reap higher returns than Social Security provides.

PRA critics rarely discuss alternatives, says Michael Tanner of the Cato Institute. That's because alternatives to PRAs are limited and unappealing: raise taxes, cut benefits or allow government investment in the stock market.

  • The most common proposal is to increase the Social Security payroll tax; however, the needed increase would be large -- $103 per worker in 2016 (the first year Social Security runs a deficit), $1,543 by 2030, and even higher each year thereafter.
  • Targeting the tax increase only to the wealthy by eliminating the cap on earnings subject to the payroll tax (currently $80,400) would hurt the economy, and only increase the program's solvency by seven years.
  • Cutting Social Security benefits by raising the retirement age or increasing the computation period used to calculate benefits would be particularly harmful to minorities, who have shorter life expectancies.
  • Allowing the federal government to directly invest Social Security funds in private capital markets would risk politicizing the investment process and undermining America's free-market economic system.

Given the alternatives, allowing workers to privately invest Social Security taxes in individual accounts makes sense, says the study. It gives workers ownership of and control over their money, increases their rates of return, allows low-income workers to accumulate wealth and moves the system toward fiscal balance.

Source: Michael Tanner, "No Second Best: The Unappetizing Alternatives to Social Security Privatization," SSP No. 24, January 29, 2002, Cato Institute, 1000 Massachusetts Avenue, N.W., Washington, D.C. 20001, (202) 842-0200

For Cato Institute report


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