NCPA - National Center for Policy Analysis

Social Security's Puny Returns

February 26, 2001

Judging by its rates of return, the Ebenezer Scrooge of government programs is Social Security. While those who were lucky enough to retire during Social Security's earlier years got considerably more in benefits than they "contributed" to the system in the few years before they retired, the rest of us will receive below-market returns.

That is the conclusion of a new study from the Cato Institute entitled "Reengineering Social Security in the New Economy," written by Federal Reserve Bank of Dallas economist Thomas F. Siems.

The "pay-as-you-go" system requires taxes from current workers to go to pay benefits to current retirees -- with nothing saved for the future.

  • But the number of workers relative to retirees has declined from 16-to-1 in 1950 to 3.4-to-1 today.
  • As a result, the average medium-wage worker born in 1959 can now expect only a 1.8 percent real rate of return, inflation-adjusted, from taxes paid into it -- a mere fraction of the return from a mixed stock-bond fund.
  • High-wage workers do even worse -- earning a 0.03 percent return.
  • Even low-wage workers get a paltry 2.6 percent real return.

Raising taxes or cutting benefits to save Social Security may be "politically intolerable," Siems writes. After all, Social Security taxes have increased from 2 percent on the first $3,000 of earnings to 10.6 percent on the first $80,400.

The solution he favors is transforming part of Social Security into individual retirement savings accounts.

Source: Thomas F. Siems (Federal Reserve Bank of Dallas), "Reengineering Social Security in the New Economy," SSP No. 22, January 23, 2001; Cato Institute, 1000 Massachusetts Ave., N.W., Washington, D. C. 20001; (202)842-0200.

For Cato text


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