Can Social Security be reformed without tax reform?
Could putting some of the payroll taxes in individual accounts avert the gross deficits that are projected for Social Security while still providing similar levels of social insurance? Some claim unconditionally yes because the money going into individual accounts will increase savings. The problem with this assertion is that unless the return to saving goes up, households will simply rearrange their portfolios to offset the funds going into the individual accounts. The reason: People already save as much as they want given current rates of return. Without an added incentive to save more, they will not. What is more, even if some of the funds in the accounts do represent new saving, there is another problem. In an open economy, this new saving will translate into U.S. investment if the rate of return to plant and equipment sited in the United States also goes up. Otherwise, new saving would flow into investment all around the world. While foreign investments would pay a return to U.S.
