Sound Social Security Policy

There is a basic fallacy to the concept of Private Accounts for Social Security. This Post will try to explain what is wrong and why.


The Saver's Credit: Issues and Options
Tax Analysts Tax Break, May 3, 2004
William G. Gale, Senior Fellow, Economic Studies
J. Mark Iwry, Nonresident Senior Fellow, Economic Studies
Peter R. Orszag, Senior Fellow, Economic Studies


Only about 5 percent of 401(k) participants make the maximum contribution allowed by law, and only about 5 percent of those eligible for IRAs make the maximum allowable contribution.

Yet 60 percent of households at or below the poverty line indicate that they save at least something. Experience with a program that provides tax advantages and matching funds to encourage saving among participating low-income families suggests that poor families will save, at least to some degree, if presented with incentives to do so.

The President's Plan as suggested will allow Workers to designate up to a $1000 per year of FICA taxation to be placed in a Private Account. The actual Average Private Accounts Savings rate will be approximately an Author-estimated $457 per Worker, if the Subscription rate reached a realistic 70 million Workers, more if the Subscription rate reaches a hoped-for 100 million Workers. The more realistic estimate states there will be $31990 millions invested in Financial Paper per year; the more optimistic estimate states there will be $100,000 millions invested. The functional Savings rate in Financial Paper could differ markedly, the Author not being a Numbers Cruncher of any note.

Here lies the Problem:

Economists relatively unify in predicting the Economy will grow about 2% per year through this Century; the Author previously doubting in a Post that the Economy will grow at all after 2021. The above Paper states actual Subscription rates in 401(k) Plans and IRAs are relatively low, with full subscription utilized by less than 5% of the Labor force. Financial Paper P/E ratios have been increasing for years, the sole rationale being Financial Paper growth is more rapid than real economic growth. Otherwise put, Hard Capital Construction investment has not been growing as fast as Financial Paper investment because of real or perceived lack of economic opportunity. Actual Dollar Inflation has been most evident in the pricing of Financial Paper, due to lack of real economic growth. Private Accounts propose to vastly increase the flow of Cash into Financial Paper. Principal cannot grow to Infinity while Earnings become miniscule; Markets will not sustain Pricing floors for Financial Paper with insufficient Returns. The Author will propose an Alternative tomorrow. lgl