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41 Tax Features 1 (1996-1997)

handle is hein.tera/taxfeaturs0041 and id is 1 raw text is: TAX@47 FOUNDATION TAX SDecember 1996-January 1997 Volume 41, Number 1 ASocial Security Becomes Increasingly 90 Bad Investment for Baby Boomers W 0¢ With baby-boom retirement looming on the horizon, most policymakers recognize the financial trouble Social Security faces, but the pending insolvency of the federal system is Chart 1: Social Security Rate of Return for Avg.-Wage Couple Current Payroll Tax v. Potential Increased Payroll Tax 18.0% 16.0% -- Current System 14.0% -- - Increased Tax 12.0% 10.0% 8.0% 6.0% 2.0% 0.0% -2.0% -4.0%- 80 70 60 50 40 30 20 10 0 Age in 1997 Source: Tax Foundation. only half of the story. The other half, as Senior Economist Arthur Hall points out in his latest Special Report, is that most future retirees can expect to lose money on Social Security when it is evaluated as an investment program for retirement. Consequently, says Dr. Hall, the challenge of reforming Social Security is not simply to restore solvency to the system. Reforms un- dertaken with solvency as the only goal - in- cluding raising payroll taxes, as Chart 1 illus- trates - will make Social Security an even worse retirement program for future retirees. The challenge is to devise a reform program that simultaneously honors the promises made to retirees and offers today's working popula- tion a better financial future. In his Primer on Social Security Reform, Dr. Hall observes that the pay-as-you-go nature of the Social Security transfer program helps explain its current political popularity as well as its looming bankruptcy. Because there has never been a clear link between the Social Se- curity contributions paid and the benefits received, workers retiring before the early 1980s received benefits based on their highest lifetime wage levels but faced relatively low lifetime payroll tax rates - and, in many in- stances, paid no payroll taxes for a large frac- tion of their working life. Consequently, retir- ces up until the early 1980s received substan- Social Security continued on page 2 Public Economic Policy Fallacies Dr. Norman Ture, President, IRET 4-5

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