Social Security Privatization

SOCIAL SECURITY PRIVATIZATION Christian De Church Professor Zeck Micro-Economics When President John F. Kennedy said Americans would be the first to walk on the moon, incompetent people said it could not be done. NASAs technology lagged years behind Russias and the Russians never did put a man on the moon. But Neil Armstrongs one small step made the dream reality. When it comes to visionary social policy, beware of those incompetent people who would reject a great plan simply because it means doing something for the first time.

Take the farsighted idea of transforming our troubled Social Security system into a system of personal accounts. Conservative estimates show that workers who invested their payroll taxes in personal accounts would get 3 to 5 times more retirement income than Social Security provides (http://www.socialsecurity.org/pubs/articles/dao-1 2-02-98.html). The Cato Institute has a long history of seeking alternatives to the current Social Security system. Since 1979 the Cato Institute has published more than 40 books, articles, and reports outlining the programs problems and crafting innovative policy solutions. Founded in 1977, the Cato Institute is a nonpartisan public policy research foundation headquartered in Washington D.C. The Institute is named for Catos Letters, libertarian pamphlets that helped lay the philosophical foundation for the American Revolution (http://www.cato.org/about/about.html).

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The Cato experts examine the problems facing our current system, the methods that can be used to move towards a system of personal retirement accounts, and the effects that a new system would have on American workers (http://www.socialsecurity.org/about/about.html). On August 14, 1995 the Cato Institute launched its Project on Social Security Privatization, the largest undertaking in the organizations history. The objective of the project is to formulate a viable blueprint for privatizing the Social Security system. Rather than paying taxes into a government-owned fund, workers should be allowed to redirect their payroll taxes into individually owned, privately invested accounts, similar to 401(k) plans and Individual Retirement Accounts (IRA). But skeptics, fearful of change, have attempted to smother the infant in the crib by latching onto the issue of the administrative costs. Imagine, they say, the logistical nightmare, the paperwork, of managing 140 million individual accounts. “No system to date has the capacity to administer such a system,” said the Employee Benefit Research Institute.

To be sure, no one knows exactly what the costs will be, but we have plenty of experience with a variety of retirement programs that indicates that we have no need to worry (http://www.socialsecurity.org/pubs/articles/dao-1 2-02-98.html). Rockets scientists did not know exactly how to put a man on the moon in 1965 either, but it did not take them very long to figure it out. Economic and financial experts have the knowledge, experience, and foresight to overcome the hurdles that are inevitable with any new programs. This current system is acting as a drag on economic growth in two important ways. First, the payroll tax distorts the supply of labor and the type of compensation sought by workers. These losses are inevitable because of the low return implied by the pay-as-you-go character of the unfolded Social Security system. Second, the system reduces national savings and investment.

But even if Social Securitys financial difficulties could be fixed by raising taxes or cutting benefits, the system would still need to be reformed because it is a bad deal for most Americans. Social Security simply costs too much and pays too little. Social Securitys rate of return on payroll taxes is a dismal 2 percent and declining (http://www.socialsecurity.org/faqs.html). Privatizing Social Security, transforming it from an unfolded pay-as-you-go system to a system of private savings accounts, would solve both of these problems and increase economic growth. Conservative assumptions imply that Social Security privatization would raise the well being of future generations by an amount equal to 5 percent of gross domestic product (GDP) each year as long as the system lasts. Although the transition to a funded system would involve economic as well as political costs, the net present value of the gain would be as much as $10-20 trillion (http://www.socialsecurity.org/pubs/ssps/ssp7es.ht ml). Women are known to be disproportionately dependent on Social Security benefits in their old age and because of longer life expectancy and employment patterns, an elderly woman is twice as likely to be living in poverty as is an elderly man.

Although the Social Security system is gender neutral on its face, it produces some financial outcomes that place women at a disadvantage in retirement compared with men. The employment patterns of women, characterized by fewer years in the labor force, lower earnings, and more frequent job changes, translate into lower Social Security benefits. The dual-entitlement rules of the system often impose a penalty on wives and widows of two-income couples. The loss of up to 50 percent of a couples benefits at the husbands death throws every fifth widow into poverty. The privatization system in fact would offer tangible financial benefits to women because the higher rates of return would boost the retirement savings. (http://www.socialsecurity.org/pubs/ssps/ssp12es.h tml) Middle Class America would enjoy the higher retirement benefit, improved economy, and personal ownership of a personalized retirement account. For example, take Middle Class Mike who is a thirty-five-year-old union worker who makes about $33,200, which is the average salary for a union worker.

He can expect just $1,559 from Social Security. In a system of personal retirement accounts, Middle Class Mike would enjoy an account of $411, 052 with a 5.75 percent rate of return (http://www.socialsecurity.org/faqs.html). Low wage workers will also benefit from the personalized accounts with their minimum wage earnings. Low wage Larry, in a system of personal retirement accounts, is a 28-year-old earning $13,500 a year. He would get just $815 from Social Security but would receive $2,292 if he invested in a mixed personal fund that would earn a 5.75 percent return (http://www.socialsecurity.org/faqs.html).

In Conclusion, Privatizing Social Security would lead to an increase in national saving, with hundreds of billions of dollars invested through individual accounts every year. Those investments, in turn, would substantially increase national investments, productivity, wages, jobs, and overall economic growth. In addition, privatizing Social Security would amount to an effective cut in payroll taxes, boosting productivity, and employment. Works Cited 1) “It Can Be Done.” Social Security. Online. Available: http://www.socialsecurity.org/pubs/articles/dao-12 -02-98.html.

April 3, 2000. 2) “About the Cato Institute.” Online. Available: http://www.cato.org.about/about/.html. April 11, 2000. 3) “The $10 Trillion Opportunity.” Online. Available: http://www.socialsecurity.org/pubs/ssps/ssp7es.htm l.

April 3, 2000. 4) “FAQs About Privatization.” Online. Available: http://www.socialsecurity.org/faqshtml. April 3, 2000 5) “The benefits of Social Security for Women.” Online. Available: http://www.socialsecurity.org/pubs/ssps/ssp12es.ht ml.

April 3, 2000.