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| SSP No. 22 |
January 23, 2001
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Reengineering Social Security in the New Economy
by Thomas F. Siems
Thomas F. Siems is a senior economist and policy advisor for the Federal Reserve Bank of Dallas. The views expressed in this paper do not necessarily represent those of the Federal Reserve Bank of Dallas or the Federal Reserve System.
Executive Summary
The United States is currently undergoing profound social, demographic,
and economic changes, shifting from an industrial base to a new information
economy, at the same time that life expectancies are increasing and the baby-boom
generation is nearing retirement. Given these changes, it is more important
than ever to reengineer Social Security, adapting it to this new reality.
Specifically, the current pay-as-you-go (PAYGO) Social Security
system is structurally flawed and produces a declining rate of return that is
far lower than the return that workers could earn through investing their taxes
in private capital markets. Indeed, young workers can expect future returns
from Social Security of from only 0.58 percent (for high-wage earners) to 2.93
percent (for low-wage workers) even if the system somehow manages to pay all
future benefits without an increase in taxes. The tax increases or benefit cuts
necessary to keep the system solvent would reduce those rates of return still
further. In contrast, workers who privately invested their payroll taxes could
expect rates of return, and retirement benefits, between four and ten times
greater.
If Social Security is to provide the same retirement security
in the new economy as it did in the old, we must transform it from a PAYGO system,
which essentially transfers wealth from one generation to another, to a system
based on savings and investment in private capital markets. Given the dangers
of allowing the government to control the investment of Social Security funds,
the only viable alternative is to move to a system of individually owned, privately
invested accounts.
Index of Social Security Choice Papers
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