Of course, one can always game the system. A friend of mine "retired" from his regular job a few years ago and went to work for his wife, who had a small antiques business. His former employer contracted with her company to do my friend's job, and she hired my friend to do the actual work. Her company was paid his old salary, and she paid him the amount he could receive without losing Social Security benefits. In the end, my friend kept on doing the same job for the same money, but in a rather roundabout way.
Not everyone has the flexibility or the resourcefulness of my friend and are faced with a difficult choice. They may want to work, but see it as a kind of tax if they don't draw Social Security benefits as soon as they can. Suppose someone has gross wages of $30,000 and $24,000 after tax from working, has just turned 62 and could make $12,000 tax-free from Social Security for doing nothing. In his mind, his income from employment has just fallen by 50 percent, because he would only lose $12,000 by quitting work altogether.
One of the greatest benefits of a Social Security system based on personal accounts is that workers would never face a use-it-or-lose-it decision. They would never forego any benefits by continuing to work. They would just continue to build up wealth, providing more income when they do choose to stop working or providing a nest egg that can be left to children or a spouse at death. Consequently, personal accounts will greatly increase work by the elderly by removing penalties for doing so.
New research by economists Alan Gustman of Dartmouth and Thomas Steinmeier of Texas Tech quantify the impact. They find that adoption of something like the Social Security Commission's second option, which is very similar to what President Bush is proposing, would reduce retirement at age 62 by 5 percent -- a significant impact -- by encouraging more seniors to stay in the labor force.
So far, there has been almost no discussion of the implications of Social Security reform for economic growth. The potential benefits, however, may be large and are an important reason to take action.
Bruce Bartlett is a former senior fellow with the National Center for Policy Analysis of Dallas, Texas. Bartlett is a prolific author, having published over 900 articles in national publications, and prominent magazines and published four books, including Reaganomics: Supply-Side Economics in Action.
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