Concern over our shrinking national savings rate is understandable. Savings are needed not only to provide for retirement but also to supply the capital stock that funds economic growth, jobs and production of goods. In the 1960s the savings rate was over 8 percent of national income; today, it’s less than half that. And it’s breathtaking to think that anyone could seriously discuss why savings are dropping without discussing Social Security.
After all, a central obstacle to private retirement savings is the fact that Social Security taxes gobble 12.4 percent of everyone’s income up front; those taxes have been raised 38 times since the program’s inception! Taking that big a chunk of people’s earnings for Social Security sharply diminishes both their reasons to save and their available resources. It destroys any opportunity low‐income workers have to save, and it sharply diminishes savings prospects for middle‐income people. And since people assume that they’ll get back the money they pay into Social Security, it’s only natural for them to cut back on savings.
At the dawn of the program, Social Security wasn’t a bad deal for people who paid in relatively little taxes but received large benefits. But requiring someone entering the workforce today to pay steep payroll taxes in return for a negative rate of return is simply outrageous — especially when they could be earning high rates of return in private markets. (The stock market has historically delivered a 10 percent annual return over the long haul — but Social Security doesn’t allow people to decide where to invest their retirement money.)
It’s not hard to understand why summit planners wanted to avoid the complex
and contentious issue of Social Security reform. After all, bringing up the reform of a program that consumes more than one‐fifth of the federal budget makes any discussion far more complex. And the sentimental New Deal imagery that the program creates in the minds of many is a gigantic roadblock to reform.
On the other hand, it’s a nice object lesson in what happens when people declare relevant issues off limits: things get worse. Does anyone really think that the commission’s methods — public service announcements urging people to save more and a worksheet that shows people how to figure out their retirement goals — will solve the problem of crushing Social Security taxes that deter savings and investment?
Educating people about the importance of savings won’t accomplish much if they don’t have enough disposable income to invest. People need more than lectures about thrift to save: they need the opportunity to put the money they earn into private retirement accounts — which would bring them a far higher return than our actuarially challenged Social Security system.