NCPA - National Center for Policy Analysis


October 26, 2004

President Bush's proposal for personal retirement accounts to supplement Social Security would impose a high cost during the transition phase, but would be a superior alternative to simply doing nothing, says William G. Shipman, co-chairman of the Cato Institute's Project on Social Security Choice.

Comparing the two plans, Shipman found:

  • Under the current system, projected payroll taxes will not be enough to pay benefits by 2018; the government would have to borrow about $4.5 trillion (in present value) up through 2078.
  • Promised benefits under the current system would cost each American family an additional $43,000, not including currently-deducted payroll taxes.
  • If instead the government allowed workers aged 21 to 34 to invest some of their payroll taxes into private accounts and reserved current benefits for older workers aged 35 and over, the payroll deficit would start at 2010, an earlier date than under the current system.
  • However, the benefit group (aged 35 and over) would eventually shrink, and with no more workers added to the group, the government's liability would drop to zero.

Those in the 21 to 34 age group who have already accrued some benefits would still receive them, but this benefit pool would shrink as more individuals invested money into personal accounts.

Granted that this would result in a negative cash flow at an earlier date, in the long run, the system will be solvent and prevent future generations from inheriting a colossal tax burden, says Shipman.

Source: William G. Shipman, "Benefits of Social Security Reform Far Outweigh the Transition Cost," Cato Institute, October 19, 2004.

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