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Young Workers Better Off Investing Social Security Contributions in Private Capital Markets

Many of today's young workers would be better off if they could invest future Social Security contributions in private capital markets, according to a recent Federal Reserve Bank of Cleveland Economic Commentary.

The Commentary's authors, economists Jagadeesh Gokhale and Kevin Lansing, note that Social Security -- especially its Old Age and Survivor's Insurance (OASI) component -- has been expanded over the years to cover more occupations while increasing the level of benefits paid out. These developments, along with the low rate of return earned by the trust fund itself, mean that workers born during the postwar period probably will receive much lower rates of return on their contributions relative to those of earlier generations. For example, workers born around 1960 are projected to earn about 1.8 percent on their contributions, while those born before 1900 have received returns of 12 percent or more after adjusting for inflation.

The authors also note that programs such as OASI and Medicare have enabled the elderly to consume a growing portion of the nation's economic pie, with a resulting decline in the national saving rate. This translates into a lower stock of productive resources, slower productivity gains, and declining real wage growth. It also has the effect of rewarding earlier participants in the program at the expense of later ones, thereby raising questions regarding the program's intergenerational fairness.

Gokhale and Lansing acknowledge that OASI may provide social benefits not reflected in monetary terms, such as forcing workers to save for retirement, and helping to reduce poverty among the elderly. But the authors argue that other programs could be devised to achieve those objectives more directly. Further delay in addressing OASI's shortcomings, they say, will only increase intergenerational inequities and impede efforts to improve living standards in the future.

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