"Add Ons" Don't Add Up

April 19, 1999

Congress is reportedly still considering several proposals to create individual investment accounts in addition to the Social Security system, rather than allowing individuals to use their existing social Security taxes to fund such accounts. President Clinton's proposal for USA Accounts is perhaps the best known of these proposals, but several other variations are reportedly under consideration, including plans now being discussed in the House Ways and Means Committee. Such "add on" accounts are a bad idea for several reasons:

1. Voluntary "Add Ons" Will Not Help the Poor. Low-wage workers have little discretionary income with which to fund such accounts. Therefore, they are unlikely to participate in such a program, even if incentives such as tax breaks or matching funds are included. For example, studies show that less than 39 percent of workers with income under $15,000 participate in their company's 401(k) program. Therefore, unlike proposals to privatize Social Security, voluntary add ons will do little to increase the opportunity for poor Americans to accumulate real wealth and savings. They are little more than another middle class tax shelter.

2. Mandatory "Add Ons" Are a Tax. Because low wage workers are unlikely to participate in a voluntary "add on," some proposals would make the "add on" mandatory, forcing individuals to save a portion of their income in addition to paying Social Security taxes. However, the impact of such a new forced savings program would be the functional equivalenty of a payroll tax increase. Certainly, it would be perceived as a tax by workers. Moreover, this new tax would fall hardest on low- and moderate-wage workers, compounding the problems of an already regressive payroll tax.

3. No Structural Reform. Many "add on" proposals, such as the President's, make no structural reforms to Social Security. Therefore, they do nothing to change Social Security's looming financial problems. But by using up the budget surplus, these proposals may make true Social Security Reform that much harder. Other proposals, such as the one being discussed by the Ways and Means Committee, do attempt to address Social security's problems, but do so in a way that eliminates most of the benefits of having individual accounts in the first place. Such measures, known as "claw backs" would recapture most of the additional returns earned through private investment and would deprive individuals of true ownership of their accounts.

"Add on" proposals are being touted as incramental steps toward Social Security reform. They are nothing of the sort. True Social Security reformers should avoid this form of dubious new math.

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