Social Security Reform’s Bad Math

In a new piece, former Social Security deputy commissioner Andrew Biggs shows how personal social security accounts might not provide the returns expected.

Former Social Security deputy commissioner Andrew Biggs notes some flaws in Peter Ferrara's pro-privatization math:

[O]nce individuals divert their payroll taxes to personal accounts, where they could indeed earn higher returns on their money, they leave a gap in Social Security’s finances that would need to be made up.

How big a gap? Social Security’s actuaries calculate that the value of Social Security benefits that have been earned but not yet paid out is around $20.2 trillion. If paid off over the next 100 years—roughly the period over which accrued benefits must be paid out—these liabilities are worth around 6.6 percent of payroll or 2.2 percent of gross domestic product. So, if we allowed workers to divert their 12.4 percent payroll tax to personal accounts, we could ensure that current benefits continue to flow by levying an additional 6.6 percent tax on their earnings, for which no additional benefits would be paid.

Obviously, once you factor this additional “transition cost” into the equation, much of the increased return that individuals would receive through personal accounts goes away.