Pay-As-You-Go Social Security:

Highlights

By Dan Cornwell, The Madison Institute

Inherent Advantages of Pay-As-You-Go

1. Built-in Inflation Protection.

Pay-in and pay-out are in the same dollars.

2. Predictability of Benefits.

Benefit levels are tied to the national average annual wage at the time payments begin. COLAs maintain purchasing power after retirement.

3. Stability of Income to the System.

The payroll tax assures a steady and reliable stream of income to support benefits.

4. Low Administrative Cost.

Current costs are below 1% of pay-out.

The Proposal

This is completely pay-as-you-go proposal which assures long-term fiscal balance and focuses on fairness across and within generations.

COLAs and the CPI

COLAs should keep up with the cost of living at each year's standard of living. They should be tied to the national average wage, not to the CPI.

The Case Against Advance Funding

Mandatory advance funding means compulsory investment, which is

1. Economically inefficient

2. Regressive in impact

3. Focused on the wrong goal.

Let's Focus on the Right Goal

The goal of Social Security is to provide insurance to every worker and immediate family against loss of income due to disability, old age, or death. The goal is not to provide an investment opportunity with good average returns but an uncertain outcome for the individual.

Fiscal Balance in a Pay-As-You-Go System

Fiscal balance requires

Since Social Security benefits are determined by a formula which ties them to the current national average annual wage, the key to assuring fiscal balance at a fixed payroll tax rate is to maintain a stable ratio of workers to retirees.

Fairness across generations requires keeping the payroll tax rate approximately constant over time.

No matter how the financing is arranged, current retirees are always supported by the goods and services produced by current workers. A pay-as-you-go system recognizes this basic truth.

Dan Cornwell
The Madison Institute
P.O. Box 5304
Madison, Wisconsin 53705-0304