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June 11, 1999
Briefing Paper no. 47

Social Security Reform Proposals: USAs, Clawbacks, and Other Add-Ons

by Darcy Ann Olsen

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Faced with Social Security's impending deficits, some lawmakers have proposed supplementing the program's benefits with personal, market-based retirement accounts for all workers. Those proposals, dubbed "add-ons" because they would be added to the existing Social Security system, do not address Social Security's financial crisis. They would merely create another centralized retirement plan requiring a new funding stream.

Proposed funding sources include voluntary individual contributions, general tax revenue, and mandatory payroll tax increases. Depending on which funding mechanism is selected, the market-based retirement accounts threaten to become tax shelters for higher-wage earners, become new entitlements, or increase the payroll tax burden. Although some add-ons are designed to "shore up" Social Security by cutting its benefits by the amounts accumulated in the accounts, such plans rely on a vast infusion of government money and offer no greater retirement income for workers.

Studies show that if workers could invest what is currently taken from them in the form of Social Security payroll taxes, they would retire comfortably. Since workers already save enough to secure a comfortable retirement, it would be more sensible to let them get a better deal on their current payroll taxes by putting that money in personal accounts. Those accounts can be integrated with Social Security and therefore have the potential to eliminate Social Security's financial crisis. In addition, the accounts can ensure that all workers, not just the wealthy, can retire with financial security.

Full text of Briefing Paper no. 47

© 2009 The Cato Institute
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