Private Investments Would Increase Retiree Benefits

Legislature Should Ask Congress to Let Workers Invest Social Security Taxes

For Immediate Release Wednesday, December 23, 1998
Contact: Vice President of Communications Joseph G. Lehman at (989) 631-0900

MIDLAND—Millions of Americans can avoid future cuts in retirement benefits and increases in payroll taxes if wage earners are allowed to privately invest a portion of their Social Security taxes, according to a new Mackinac Center for Public Policy report.

The Center recommends that the Michigan Legislature adopt a resolution that calls on Congress to either allow workers to shift all or part of their current 5.26-percent Social Security retirement payroll taxes to privately owned and managed accounts or grant the state a waiver to opt out of the federal Social Security program and design a better system for its citizens.

Oregon and Colorado have passed similar resolutions and six states are considering them.

Social Security will collect less in taxes than it must pay out in benefits as soon as 2015. Since the program began in 1935, the worker-to-retiree ratio has dropped from 16-to-1 to 3-to-1 and is still dropping.

Ways to keep Social Security solvent include raising taxes, cutting retirement benefits, and allowing workers to invest their own funds privately. Reform plans including privatization were considered two weeks ago at a bipartisan White House Conference on Social Security.

The Depression-era program operates on a "pay as you go" basis, whereby current workers' taxes go immediately to pay current retirees' benefits. In private retirement accounts, contributions are held and invested in separate accounts owned by individual workers.

Historically, private investments have far outperformed Social Security, and public opinion polls show strong support for major reforms including partial privatization.

The Mackinac Center report shows how investment of as little as 2 percent of payroll taxes would result in retirement benefits from 9 to 35 percent greater than those provided by Social Security. The partial privatization detailed in the report would leave enough money in the system to maintain retiree benefits and help finance the transition to a better plan.

Three-fourths of adults want the option to invest part of their Social Security taxes in the stock market, according to a December poll conducted for The Associated Press. An October Rasmussen Research poll found that 77 percent say they can invest their retirement funds more effectively than government. Only 16 percent would stay in the current system if given a choice.

Chile, Great Britain, Australia, and Sweden already allow private investment of at least some retirement payroll taxes. Chileans now enjoy benefits three times higher than those under their old government system.

Social Security causes dramatic losses. The Heritage Foundation Center for Data Analysis calculates that a Michigan dual-earner couple born in 1967 with two children will lose an average of $245,134 in retirement benefits due to Social Security compared to the same amount invested in conservative 30-year U. S. Treasury Bonds. If the alternative investment is half in Treasury Bonds and half in equities, the lifetime loss due to Social Security is $587,972.

More than 65 million Americans already supplement their expected Social Security benefits by investing in private instruments including Individual Retirement Accounts and employer-sponsored 401(k) and 403(b) plans that outperform Social Security.

Mackinac Center researchers point out that lower-income earners who can not afford both Social Security taxes and private investments would be helped the most if workers were allowed to shift some of their payroll taxes to private accounts.

The Mackinac Center is a ten-year-old, nonprofit, nonpartisan research and educational institute. The 21-page report, Saving Retirement in Michigan: Responsible Alternatives to Social Security, may be obtained by calling (989) 631-0900, or via the Internet at www.mackinac.org.

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