Private Investment of Social Security:
The $10 Trillion Opportunity
Although reforming the Social Security retirement program is an issue of enormous importance, elected officials are still unwilling to confront this serious but politically dangerous problem. Eventually, however, the system's deteriorating financial condition will force major reforms. 1 Whether those reforms are good or bad, whether they deal with the basic economic problems of the system or merely protect the solvency of existing institutional arrangements, is the crucial policy issue. Simply protecting the solvency of the unfunded system by tampering with taxes and benefits will perpetuate existing adverse effects on labor markets and national saving. Shifting to a system of funded individual accounts can produce a major increase in national income and in the well-being of the population.
Central to the analysis of Social Security's impact on the economy is the concept of “Social Security wealth,” defined as the present actuarial value of the Social Security benefits to which the current adult population will be entitled at age 65 (or are already entitled to if they are older than 65) minus the present actuarial value of the Social Security taxes that they will pay before reaching that age. Social Security wealth has now grown to about $10.5 trillion or roughly equal to the 2002 total value of GDP, which is equivalent to more than $48,000 for every adult in the country. 2 Its value substantially exceeds that of all other assets for the vast majority of American households.
Social Security wealth is of course not real wealth but only a claim on current and future taxpayers. Instead of labeling this key magnitude Social Security wealth, it could more accurately be called
Originally published as Cato Institute Social Security Paper no. 7, January 31, 1997, this essay was adapted from the author's Richard T. Ely lecture to the American Economics Association delivered in January 1996. It has been updated to reflect current information.