Monday, January 03, 2005

Can We Afford Private Accounts?

The Heritage Foundation shows here that 74 percent of current Social Security withholding is used to pay current benefits while the remaining 26 percent is the surplus being set aside for the GenXers. Another way of looking at this is that three-quarters of your deferral (9.3 percent of your total pay) is being used to pay today's retirees.

That leaves the reminaing one quarter (3.1 percent of your paycheck) to be parked in the special government bonds sold to the Social Security system by Congress. In turn, Congress is spending those funds on other (non-retirement) things.

If that 3.1 percent were used to fund private accounts Congress would have to find the funds elsewhere. But is this a bad thing or a good thing? In essense, using the funds for private accounts would return the surplus to wage earners, but would still guarantee that the funds would be used for their retirement.

The change would also require Congress to come up with the 3.1 percent from somewhere else, presumably through an increase in income taxes or debt issuance. Yet, because of the way Social Security taxes are assessed, both of those alternative fund raising methods would appear to be more progressive than in the current system.

Comments anyone?


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