NCPA Study: Saving The Surplus
January 18, 2001
Allowing workers to invest some of their payroll taxes in personal retirement accounts (PRAs) is a better use of the Social Security surplus than paying down the national debt, according to a new NCPA study.
- In fact, if the surplus was used to pay off the national debt, but nothing is done to reform Social Security, by 2021 the government would have to start borrowing again.
- And by 2029 we would have the same level of debt as we have today.
- At that point, the government would have to borrow even more money or raise taxes.
The study, directed by Tom Saving, a professor at Texas A&M University and director of the University's Private Enterprise Research Center, compares using the Social Security surplus to pay down the debt with investing in stocks and bonds.
"Getting out of debt is a good thing," said Saving, who was recently appointed a trustee of the Social Security and Medicare trust funds. "But future promises to pay Social Security benefits are another type of debt; one that keeps growing year by year."
- However, if today's Social Security surplus is invested, as investment funds grow, they would reduce the government's obligation to pay future benefits.
- As a result, by 2050 the government could meet its obligations to retirees with about the same payroll tax rate we have today - 12.5 percent.
- By contrast, without investment, by 2050 we will have either four times as much debt as we have today, or a payroll tax rate (19.6 percent) that is 57 percent higher.
"Using the surplus to reduce the federal debt would help in the short run, but not in the long run," said Saving.
Source: Liqun Liu, Andrew J. Rettenmaier and Thomas R. Saving (Private Enterprise Research Center, Texas A&M University), "Saving the Surplus," NCPA Policy Report No. 241, January 2001.
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