#212  

 September 1998




The Time is Now for Social Security Privatization

by Glen Turpening

 

Social Security is a great idea - but only on paper.

Although Social Security has worked for decades, this "pay-as-you-go" system where the current workforce pays the tax revenues to provide retired Americans with an income will only operate smoothly as long as working men and women greatly outnumber the retired.

Social Security's architects never anticipated the baby boom generation or increased life expectancies. This demographic shift has created a financial crisis now threatening the economic safety net so many people are relying on for their golden years.

To solve this impending crisis, the government should seriously consider proposals linking retirement security to market forces: proposals that are already being successfully applied in other countries.

According to the National Center for Policy Analysis (NCPA), there were five workers paying into Social Security for every one retiree in 1960. Right now, that ratio is just over three-to-one. It is expected to fall to two-to-one by 2030. At this rate, the Cato Institute figures Social Security will be bankrupt by 2012, possibly even by 2006. By 2020, Social Security could run a deficit of $232 billion with the potential grow to $160 trillion by 2075!

How would privatization save retirement security? NCPA's Merrill Matthews Jr. proposes allowing workers to choose where their Social Security taxes are deposited. His plan would allow working individuals to direct their 12% payroll tax into a private account that could be invested in private sector assets, stocks and bonds. Individuals would also have the option of remaining in the current system. Matthew's plan would retain and secure benefits for current retirees and those near retirement age. Matthews says his plan would "solve the financing problems while ensuring the safety and solvency of seniors' retirement accounts."

A Cato Institute plan would put Social Security taxes into private accounts that individuals can choose without government intervention. Current retirees and those near retirement could remain in the current system, while people now in the workforce would continue paying their Social Security benefits. Everyone under a yet-to-be-determined age (probably around 32) would instead put their money into private investments.

The Cato Institute points to the past performance of the stock market to soothe the apprehensions some people have about market volatility and uncertainty. Past stock market performance between the years 1926 and 1996 show an annual nominal return of 10.89% and 7.56% when adjusted for inflation. Some may also be concerned about a stock market crash nearly eliminating an individual's retirement plan. Once again noting long-term trends, the Cato Institute notes stocks have out performed government bonds 99.38% of the time for all thirty-year periods.

Concerns about stock market volatility, however, need to be balanced by concerns about the volatility of the existing Social Security system. Congress has the ability to cut Social Security benefits or lower the amount of tax money put into its trust fund at any time. For decades, Congress has added to Social Security's instability by spending the Social Security trust fund on other programs. Nothing underscores Social Security's volatility more than the fact that it is currently expected to be bankrupt within a generation.

A handful of nations are currently experimenting with private sector social security investments with great success. Chile, a trailblazer in social security privatization, offers its workers an option to deposit 10% of their annual income into various financial plans that have been approved by the government.

According to the NCPA, approximately 93% of Chileans are putting their money in the new program. The savings rate in Chile has risen from 10% to 27%, and worker retirement accounts are averaging 12% returns on their investments. Individuals receiving disability benefits from the privatized accounts have seen their benefits increase by 50%, as have those receiving survivor's benefits. Chile's success has led Peru, Mexico and Argentina to adopt privatization as part of their social security plans.

Here in America, support for privatizing Social Security is crossing ideological lines. Liberal Senator Daniel Patrick Moynihan (D-NY) boosted privatization efforts recently by introducing Social Security legislation that offered limited privatization.

Reform of Social Security will mainly benefit those in the lower economic strata by allowing them to take advantage of compounded interest that usually only those with higher incomes enjoy. Senator Rick Santorum (R-PA) has said, "It is important that we understand that the people that [privatization] helps are not wealthy, but low-income people and minorities."

Solid international evidence that privatized Social Security works has empowered proponents and allowed them to become the most influential voices in debate over the future of Social Security. Individuals such as Sen. Paul Wellstone (D-MN), a privatization opponent, has stated, "We are now behind the eight ball. They have done a masterful job."

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Glen Turpening is a research associate of The National Center for Public Policy Research. Comments may be sent to [email protected].



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