Social Security Reform Critics' Alternate Proposals Would Overtax Or Underprovide, New Study Shows

1/29/2002

From: Joan Kirby, 202-789-5266, or Michael Tanner, 202-789-5258, both of the Cato Institute

WASHINGTON, Jan. 29 -- In response to the recommendations of the Commission to Strengthen Social Security, critics of personal retirement account proposals are proposing a range of "alternative" options that include higher payroll taxes, significant cuts in retirement benefits, federal investment in the stock market or doing nothing at all, a definitive study released today by the Cato Institute shows.

The study, "No Second Best: Alternatives to Social Security Privatization," outlines proposals by more than a dozen prominent economists, activists, labor officials and liberal scholars about their "solutions" to the Social Security crisis. These "solutions," however, could deeply impact the poor, women and America's minorities without providing a sustainable long-term formula for increasing retirement security, according to the study.

"Alternate" plans examined in the study include those proposed by such well-known individuals as Henry Aaron of the Brookings Institution, former Social Security Commissioner Robert M. Ball, Jeff Faux of the Economic Policy Institute and economist Robert Reischauer. The study also reviews the ideas of prominent anti-reform activists, including Hans Reimer of the 2030 Center, Lisa Maatz, formerly of the Older Women's League, Roger Hickey, director of the Campaign for America's Future, and union officials from the AFL-CIO.

In reviewing various payroll tax increase proposals, the study concludes that assuming current projections for Social Security's shortfall in 2016, the required tax burden per worker by 2030 would increase to $1,543 annually. Other proposals reviewed include indexing payroll tax increases to future increases in longevity, targeting a tax hike to upper-income workers by raising the $80,400 cap, taxing all stock transitions at 0.25 percent or raising the capital gains tax from 18 percent to 28 percent.

Examining the impact of these tax-raising "alternate" proposals, the study concludes: -- General payroll tax increases would fall heaviest on low-income workers and African Americans; -- Eliminating the income cap altogether would amount to the largest tax increase in tax history -- $461 billion over 5 years -- yet only extend the payroll tax solvency of Social Security for 7 years; -- Repeal of the tax reductions passed by Congress in 2001 due to expire in 2009 would ultimately have no impact on the solvency of the Social Security system; -- Moving the 5 million state, county and municipal workers who have opted out of Social Security back into the system would result in a 12.4 percent tax hike for those workers, leading them to curtail other private pension savings.

On benefit cut "alternate" proposals, the study concludes: -- Drastically reducing or eliminating spousal benefits would reduce women's retirement security; -- Cutting benefits by increasing the benefit computation years from 35 to 38 years would disproportionately impact women, who have more low earning years; -- Raising the retirement age would have a disproportionately negative impact on African Americans.

Government investment of Social Security funds, according to the study, would: -- Transfer a significant, if not controlling share of every major company in America to the government since a 2-3 percent block of shares traditionally gives a shareholder influence over public companies.

Michael Tanner, director of Cato's Project on Social Security Privatization and author of the study, concluded, "The American people deserve a fair and honest debate about Social Security reform. They deserve to see the various proposals side-by-side so that they can compare the alternatives.

"Given the alternatives, I am confident that Americans will choose to take control over their retirement funds through individual accounts."

The study can be accessed at http://www.cato.org/pubs/ssps/ssp-24es.html

--- Michael Tanner is available for comment on the study. For a copy of the study or to schedule an interview, please call Joan Kirby at 202-789-5266 or Michael Tanner directly at 202-789-5258.

The Cato Institute is a nonpartisan public policy research foundation dedicated to broadening policy debate consistent with the traditional American principles of individual liberty, limited government, free markets, and peace.