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. NASA’s technology lagged years behind Russia’s and the Russians never did put a man on the moon. But Neil Armstrong’s 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-12-02-98.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 program’s 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 Cato’s Letters, libertarian pamphlets that helped lay the philosophical foundation for the American Revolution (http://www.cato.org/about/about.html). 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 organization’s 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-12-02-98.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 Security’s 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 Security’s 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.html).

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