NCPA - National Center for Policy Analysis

Only 15 Years Left To Avoid Social Security Debacle

June 6, 2001

The end of Social Security as we know it is just 15 years away. We face a $19.8 trillion unfunded Social Security liability -- and the first IOUs will be due in 15 years.

Refusing to accept this reality, some political commentators suggest working around the problem by cutting benefits and raising taxes. But reducing benefits is not a practical option, experts say, and the tax increases needed would be a tremendous burden.

  • The National Center for Policy Analysis calculates that today's 12.4 percent Social Security payroll tax would have to increase by nearly half.
  • That means that when today's 18-year-olds become eligible for retirement in 2050, their children and grandchildren would face a payroll tax of 17 percent to pay Social Security benefits -- and 32.8 percent when Medicare and other health benefits are added in.
  • Or if raising income taxes were the option chosen, rates would have to rise by 16.7 percent to cover retirement benefits in 2030, according to the Cato Institute's Andrew Biggs.
  • Borrowing the money would mean an additional debt of $7 trillion by 2030 -- and that debt would continue to grow.

A realistic solution, which should be obvious, is to allow workers to invest in the stock market or buy bonds to prepare for their own retirement needs.

  • Even such an ultra-cautious investment as long-term, inflation-protected U.S. Treasury bonds now yield 3.4 percent -- compared to Social Security's average return of about 2 percent.
  • The one million state and local government employees who opted out of Social Security when it was still legal to do so have incomes 2.5 to 7.5 times higher than Social Security incomes.
  • Moreover, retirement accounts create real wealth which allows people to pass along to their heirs the tens or even hundreds of thousands they have accumulated -- which those on Social Security cannot.
  • Most important, the larger an individual's personal account retirement income is, the less Social Security will have to pay that retiree.

Source: Pete du Pont (National Center for Policy Analysis), "Called to Account," Wall Street Journal, June 6, 2001.

For text (WSJ subscribers)

http://online.wsj.com/articles/SB991786236474195949.htm

 

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