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December 6, 2001
Social Security Choice Paper no. 23

The Impact of Social Security Reform on Low-Income Workers

by Jagadeesh Gokhale

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Because the poor are disproportionately dependent on Social Security for their retirement income, they will be among those most affected by any reform of the troubled retirement program. Traditional reforms, such as raising taxes or cutting benefits, will leave low-income workers worse off. However, allowing workers to save and invest a portion of their Social Security taxes in individual accounts may avoid or offset potential benefit cuts, without increasing taxes.

Equally important, individual accounts may provide an opportunity to address some of the other problems with the current Social Security system, in particular its impact on wealth accumulation, the intergenerational transfer of wealth, and the inequality of wealth in America.

Poor households currently save very little and therefore own almost no financial wealth at retirement. As a result, the distribution of bequeathable wealth among retirees in the United States is highly unequal. There is strong evidence that Social Security may be contributing to that inequality. In contrast, a system of individual accounts would allow workers to accumulate real and bequeathable wealth, leading ultimately to greater overall equality of wealth. Social Security privatization therefore becomes the truly progressive option for reform.

Full text of Social Security Choice Paper no. 23

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