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| SSP No. 18 |
November 29, 1999
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Social Security Is Still a Hopelessly Bad Deal for Today's Workers
by Peter J. Ferrara
Peter J. Ferrara is chief economist and general counsel with Americans for Tax Reform and a senior fellow with the Cato Institute. He is the coauthor, with Michael Tanner, of A New Deal for Social Security.
Executive Summary
The argument that Social Security is a bad deal for today’s workers and that
they would get higher returns and benefits by investing through personal accounts
instead has gained broader and broader acceptance. This view has greatly fueled
reforms and proposals in the United States and abroad that are based on personal,
private investment and insurance accounts.
However, the National Committee to Preserve Social Security and Medicare recently
released a voluminous study by John Mueller arguing that Social Security would
provide higher returns and benefits than a system of personal investment accounts
for all workers today, of all income levels and family combinations. That conclusion,
directly contradicting a wide range of analysts, institutions, leaders, and
countries around the world, results from extreme and untenable assumptions:
- Mueller assumes that the returns to workers investing in the stock market
will be 77 percent less over the next 75 years than stock market investors
have earned over the past 75 years.
- He assumes that over the next 75 years investors will get a negative real
return on corporate bonds, down dramatically from the 3 to 4 percent real
return that has prevailed over the past 75 years.
- He projects that the rate of economic growth over the next 75 years will
decline by over 50 percent compared with the past 75 years, and he fails to
account anywhere for the increase in economic growth that would result from
Social Security privatization.
- Mueller assumes administrative costs for personal retirement accounts that
are more than two times and probably over five times what the costs would
likely be in the early start-up years, and 25 to 50 times what the costs would
likely be in later years.
- Mueller assumes a transition financing plan that imposes increased taxes
on workers and their retirement accounts, failing to recognize studies showing
how the transition could be financed without higher taxes or effective reductions
in the projected benefits from the personal accounts.
- Mueller fails to take into account the before-tax, real rate of return to
capital, which measures the full, net benefit produced by the private capital
investments made through the personal retirement accounts.
Index of Social Security Choice Papers
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