President George W. Bush can successfully have it all–the 10-year $1.35 trillion tax cut and privatized Social Security. By deferring a portion of each worker’s income tax to the stock market and distributing part of the projected budget surpluses, if they materialize, this country can maintain the current Social Security system as an umbrella against adverse markets, and secure the retirement years of the American worker.
During the 2000 presidential campaign, Bush proposed diverting two percent of the Social Security tax into privatized accounts. This proposal actually reduces the Social Security revenue in the system by approximately 16 percent. (Social Security taxes are 12.4 percent. A two percent diversion represents 16 percent of that revenue.) Therefore, it seems reasonable to conclude that future benefits from the current system would need to be reduced by at least 16 percent in order to maintain a balanced cash flow.
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Bush’s original proposal also allows for “emergency” withdrawals from the privatized account. This has the potential to create a troublesome equation–an “emergency” withdrawal of all privatized funds prior to retirement plus a 16 percent reduction in the current system benefits could equal a Social Security retirement income less than the current system alone.
The current Social Security system does provide retirees with a measure of economic independence. But the monthly benefits are relatively small and some type of privatization would supplement that income. So, how can the benefits of the systems be enhanced, without removing the safety net currently provided?
There may be at least two options to help all U.S. workers who are age 22 in 2001 to retire with greater security at age 67. Using the S&P 500 stock index’s annual net return of 12 percent (from 1958-2000) to predict future privatized returns, both options preserve the umbrella of the current Social Security system while also potentially providing combined retirement benefits valued at $30,000 in today’s dollars (and increasing by 3.5 percent per year thereafter for 25 years).
The first directs quarterly income tax deferrals to the private sector anticipating a 12 percent rate of return from 2001 through 2045, at which time the accumulated fund will be invested in U.S. Government securities with an anticipated net rate of return of 5.5 percent for 25 years. This will guarantee the availability of the supplemental monthly benefits.
The second alternative is to leave the funds in a stock index earning 12 percent annually throughout the accumulation and depletion years, from 2001 through 2070. Quarterly income tax deferrals of $195, $148, $109, and $70 would be necessary for the Low, Average, High, and Maximum wage categories, respectively, giving an average annual income tax deferral of $522 per worker. With the assumption of equal numbers of workers in each category, a total of approximately $75 billion dollars of taxes would be deferred. This would still leave $60 billion for direct tax relief.
If either alternative is implemented for the next 45 years, all workers who will be insured by Social Security will receive approximately $30,000 (the national average wage of year 2001), in today’s dollars. And the umbrella of a full benefit from the current system would still be in place should investment adversity strike. Upon the death of the retiree, the residual amount in the fund that was supplying the supplemental benefits could be transferred to his or her estate–thereby completing the “tax reduction” that began 45 years earlier. Should the retiree live beyond the 25 years (age 92), he or she would still have the umbrella of a full benefit of the current system. It is time for “equal Social Security for all!”
Robert Muksian, Ph.D. is a mathematics professor at Bryant College.
