Use The Surplus To Reduce Future Social Security Debt

March 14, 2001

If the federal government does not use projected budget surpluses of $5.6 trillion for tax cuts, spending increases or Social Security privatization, surpluses will presumably be used to pay down the government debt available for repurchase and then to buy assets that earn a return, such as corporate bonds and stocks. This means that beginning in 2006, the government would accumulate and hold significant levels of private financial assets.

After the government retires all its debts, it could accumulate assets totaling $3.2 trillion. However, once the surpluses end, the government will sell some of its assets each year to make up for projected revenue shortfalls for the Medicare and Social Security programs. And by 2050 the savings will be completely depleted, necessitating additional taxes or borrowing.

Alternatively, the surpluses could be placed in personal retirement accounts (PRAs) that would replace some of the government's obligation to pay benefits during the retirement years. In this way, PRA deposits could be used to "retire" the government's implicit debts.

This would allow the payroll tax rate to be cut:

  • Beginning in 2025, the payroll tax rate can be reduced.
  • By 2050, the payroll tax rate falls to 6.35 percent compared to the 16.33 percent required without prefunding.

Using all of the budget surpluses to fund personal retirement accounts would go a long way toward prepaying Social Security. The long-run Social Security payroll tax could be reduced 60 percent from the level required if today's surpluses are used instead to pay down debt. This suggests that by taking advantage of the surpluses it is possible to address the greatest fiscal challenge that awaits the nation.

Source: Andrew J. Rettenmaier (NCPA senior fellow), "Saving for a Rainy Day," Brief Analysis No. 352, March 14, 2001, National Center for Policy Analysis.

For text

http://www.ncpa.org/pub/ba352/

 

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