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Social Security Reform Proposals

USAs, Clawbacks, and Other Add-Ons

by Darcy Ann Olsen

No. 47

June 11, 1999

Social Security by cutting its benefits by the

Faced with Social Security's impending

amounts accumulated in the accounts, such

deficits, some lawmakers have proposed sup-

plans rely on a vast infusion of government

plementing the program's benefits with per-

money and offer no greater retirement income

sonal, market-based retirement accounts for

for workers.

all workers. Those proposals, dubbed "add-

Studies show that if workers could invest

ons" because they would be added to the exist-

what is currently taken from them in the form

ing Social Security system, do not address

of Social Security payroll taxes, they would

Social Security's financial crisis. They would

retire comfortably. Since workers already save

merely create another centralized retirement

enough to secure a comfortable retirement, it

plan requiring a new funding stream.

would be more sensible to let them get a better

Proposed funding sources include volun-

deal on their current payroll taxes by putting

tary individual contributions, general tax rev-

that money in personal accounts. Those

enue, and mandatory payroll tax increases.

accounts can be integrated with Social

Depending on which funding mechanism is

Security and therefore have the potential to

selected, the market-based retirement accounts

eliminate Social Security's financial crisis. In

threaten to become tax shelters for higher-

addition, the accounts can ensure that all

wage earners, become new entitlements, or

workers, not just the wealthy, can retire with

increase the payroll tax burden. Although

financial security.

some add-ons are designed to "shore up"

Darcy Ann Olsen is an entitlements policy analyst at the Cato Institute.