NCPA - National Center for Policy Analysis

Personal Retirement Accounts and Small Business

December 12, 2001

Allowing taxpayers to invest a portion of their Social Security retirement taxes would be a boon to small businesses and entrepreneurs.

One reason is that Social Security benefits are more likely to fund a larger share of the retirements of small-business owners; thus reducing the program's impending financial problems is important to their financial security. Personal accounts would dramatically improve the rate of return on payroll tax payments, thereby enhancing retirement income.

  • While 79 percent of mid- to large-size businesses offer employer-supported retirement benefits, far fewer smaller businesses do so.
  • Among businesses with 25-99 employees, the figure is 46 percent; for businesses with 10-24 employees, it is 34 percent; and for those with one to nine employees, it drops to 22 percent.
  • A study by the National Association for the Self-Employed found that more than three-quarters (78 percent) of its members had saved less than $100,000 for retirement even though virtually none had private-sector pensions and their median age was 46.

One alternative to personal retirement accounts is higher payroll taxes; but Social Security taxes already contribute to high marginal tax rates that discourage entrepreneurship.

  • Research indicates that a 5 percent increase in marginal tax rates leads to a 10.4 percent decrease in the probability of investment by sole proprietors.
  • With a typical 5 percent state income tax, 28 percent federal income tax and 15.3 percent in Social Security and Medicare taxes, marginal tax rates are already above 40 percent for the self-employed.

Additionally, personal retirement accounts would help small businesses by reducing the government's unfunded liabilities and increasing the pool of privately invested capital.

Source: James Morrison, "Social Security Reform Helps Small Business," Backgrounder No. 1494, October 17, 2001, Heritage Foundation.


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