The Social Security Fund and National Capital Accumulation and Discussion

The Social Security program is almost certain to have a major influence on the Nation’s rate of capital accumulation. For most Americans, Social Security is the primary form of saving for retirement. As such, the high and increasing level of Social Security benefits can markedly reduce personal saving and private capital accumulation; the evidence reviewed below suggests that this does in fact occur. The Social Security program also provides the opportunity to offset this reduction in private saving by developing a substantial Social Security capital fund. Indeed, the long-run financial problem that Social Security faces because of the Nation’s changing demographic structure will almost certainly require the accumulation of a significant fund during the period of demographic transition. The primary purpose of this paper is to present estimates of the Social Security fund and the associated contributions to national capital accumulation that would result from alternative tax rates. The analysis shows that even a transitional Social Security fund, i.e., one that is intended only to permit a constant level tax rate for present and future generations, makes an important temporary contribution to capital accumulation. The possible permanent contributions of alternative Social Security capital funds are also analyzed. To put these simulations into perspective, I shall begin in section 1 with a general discussion of the effect of Social Security on private capital accumulation. The second section summarizes the long-run financial problem of Social Security and the role that a Social Security fund could play in its solution. Section 3 then discusses in more detail the way in which the accumulation of such a fund might operate and reviews the objections to a Social Security fund. The simulations of alternative Social Security funds are presented and discussed in section 4.