February 5, 2005 | WebMemo on Social Security
Some opponents of the President's plan to reform Social Security say that the government would seize the money in a worker's personal retirement account (PRA) at retirement. This charge is completely untrue. Such critics misunderstand the plan's simple mechanism to decide what proportion of a worker's retirement benefits would be paid through a monthly government check and what proportion would come from the PRA.
Under the President's plan, both the PRA and the traditional monthly benefit would be funded by the same Social Security payroll tax that today finances the traditional Social Security benefit alone. If workers were to invest some of their payroll tax in a personal account and receive retirement earnings from that account, it makes sense that they should not receive the same traditional Social Security benefits as someone who chose to leave all their taxes in the system. Without some means to adjust for the money directed into the PRA, workers would be double dipping-receiving both the full traditional monthly benefit without paying the full freight while also receiving income from a PRA financed with payroll taxes.
Under President Bush's plan, the 10.6 percent Social Security payroll tax that today finances monthly retirement and survivors' benefits would be divided into two parts. When the plan is fully phased in, 4 percentage points would go to the worker's PRA and the remaining 6.6 percentage points would finance government-paid monthly retirement benefits. Quite appropriately, a worker would not receive the same level of government-paid monthly benefits from a 6.6 percent tax on wages as from a 10.6 percent tax. A PRA that is funded with a portion of the Social Security payroll tax would finance the worker's additional retirement benefits.
With a PRA, retirees would receive benefits that are partly paid by the government and partly paid from the PRA. When workers retire, several steps would determine how much they receive from each part:
When a worker retires, the Social Security Administration calculates that he should receive a total Social Security retirement benefit of $1,200 a month based on his income history. The hypothetical calculation shows that his PRA could pay $400 a month. Therefore, the government-paid monthly benefit would be $800 a month.
When the $800 is added to the $400 from the PRA, the $1,200 monthly benefit is reached. But if the PRA earned more than 3 percent annually after inflation, then the worker would either have money left over for a nest egg or could choose to take a higher monthly benefit.
This mechanism in the President's plan is a common-sense step to prevent double dipping. The government does not take away any of the retiree's PRA, and in no sense are the taxes devoted to PRAs a loan for speculative investment, as some have mistakenly claimed. Younger workers who are able to invest a portion of their payroll taxes in the PRAs described in the President's plan will almost certainly earn a greater rate of return than today's Social Security is able to provide. Critics' confusion about the operation of PRAs should not be allowed to obscure this fact.
David C. John is Research Fellow in Social Security and Financial Institutions in the Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundation.
 An additional 1.8 percent of income goes to finance Social Security disability benefits, for a total tax of 12.4 percent of income. All taxes are dived equally between the employer and the worker.