Small business has much to gain and very little to lose if Congress establishes Social Security personal retirement accounts. These accounts, which would allow taxpayers to invest a portion of their Social Security retirement taxes, would make capital more available to small businesses without adding any appreciable administrative burden. In addition, since Social Security benefits are more likely to fund a larger share of the retirements of small-business owners, reducing the program's impending financial problems is even more important to their financial security.

Social Security reform should be crafted with a recognition of the particular needs and vulnerabilities of small businesses and entrepreneurs. These can be explored in terms of two categories--concerns that affect the small business community as a whole and those related to the operation of specific businesses.

CONCERNS AFFECTING THE ENTIRE BUSINESS COMMUNITY
The debate over Social Security's coming financial problems involves concerns that, in addition to those that would affect the day-to-day operations of individual small businesses, would affect the small business community as a whole.

Greater Dependence on Social Security for Retirement Income.
Employees of small businesses and entrepreneurs almost certainly will be more dependent on Social Security benefits than those entering retirement from larger enterprises. While 79 percent of mid- to large-size businesses offer employer-supported retirement benefits, far fewer smaller businesses do so.

The Impact of Marginal Taxes .
Entrepreneurs (who already face high taxes) are probably more sensitive to changes in tax rates and tax structure than wage-and-salary workers are. Research indicates that a 5 percent increase in marginal tax rates leads to a 10.4 percent decrease in the probability of investment by those sole proprietors and that marginal tax rates that are high and progressive strongly discourage entry into self-employment and business ownership. Social Security taxes already have helped to drive marginal rates above 40 percent for many taxpayers. A taxpayer in the 28 percent federal income tax bracket, for example, typically pays 5 percent in state income taxes and 15.3 percent in Social Security and Medicare taxes.

Access to Capital
Allowing Social Security recipients to place a portion of their taxes in personal accounts that they own and control would initiate a "virtuous cycle" for capital markets. For one thing, it would create a favorable climate for balanced budgets or surpluses by reducing the government's unfunded liabilities. The experience of the past few years indicates that federal budgets that have surpluses instead of massive deficits are good for small business capital needs. Since 1998, small business has enjoyed the best access to capital on record, according to economic data tracked by the National Federation of Independent Business.

Creating personal accounts would have an effect not unlike creating employer-provided pensions. Capital would build up and would be put to productive use. Small business would benefit--directly, through investments from the funds themselves and, indirectly, through transactions with financial service intermediaries with access to the funds. Perhaps most important, personal accounts would dramatically improve the rate of return that entrepreneurs could expect on their payroll tax payments and thereby enhance their retirement income.

CONCERNS REGARDING OPERATIONS OF INDIVIDUAL BUSINESS
The debate about Social Security reform also entails concerns regarding day-to-day business operations, one of which is the purported administrative burden that personal accounts would place on small business. It should be noted that major small business associations in the United States--associations that presumably have had ample time to study the issue--have been strongly urging Congress to enact personal accounts for years.

The "small business administrative burden" critiques often overlook or misinterpret the approach of the most widely accepted current proposals for personal accounts, which minimizes the administrative burden on employers. Most of the current proposals for personal savings accounts do not require employers to select investment funds or fund managers for their employees, set aside or independently deposit any funds, transmit any funds to workers, separately transmit any funds to the federal government, frequently submit information relating to personal accounts, choose annuities for workers, or bear legal or fiduciary responsibility for the performance of any of their employees' investments.

The proposals generally follow the example of the Thrift Savings Plan (TSP) that is currently available to federal workers. A portion of the employees' Social Security taxes would automatically be reserved by the Treasury Department for Social Security. This money would be deposited by that agency or the Social Security Administration into a "default" fund, indexing a large number of stocks, or purchasing low-risk Treasury securities, or both. As these accounts reached a specified size, workers would be able to choose from a group of carefully selected and regulated investment options. They, not employers, most likely would do so by checking a box on a form at the time of employment or later. As for the employer's "administrative burden," the most that any of the current proposals entail is an annual reconfirmation of the "box" that employees have checked. Employers who want to do more may do so.

The administrative "burden" on small businesses would be very minor under such a TSP approach, and small businesses stand to benefit substantially from Social Security reform that includes personal accounts. The energy invested in attempts to mislead small-business owners regarding Social Security reform should be countered with efforts to provide leadership on this issue. That is the task of those who favor personal accounts.

James Morrison, Ph.D., has specialized in small business and entrepreneurship policy for more than 20 years. He has worked for Congress, government agencies, international development organizations, and small business trade associations.