It’s Time To Privatize Social Security

As Social Security lumbers toward bankruptcy, some policy-makers are suggesting that we - you and I, the taxpayers - bail it out. When the amount of money coming into the program no longer pays for the level of benefits Social Security owes to retirees, these lawmakers suggest, Congress can simply impose higher payroll taxes to make up the shortfall.

But American workers already have been socked by 17 payroll tax increases in the last 40 years. The payroll tax rate was only 2 percent when Social Security began in the 1930s. It climbed to 3 percent in 1950, reached 6 percent in 1960, more than 8 percent in 1970, more than 10 percent in 1980, and now consumes 12.4 percent of an average worker’s wages. And the amount of income upon which the tax is paid keeps rising too. As recently as 1971, workers only paid the tax on their first $7,800 of income. Today, the tax is levied on all wages up to $65,400!

Huge new tax increases are not the answer. Not only would they penalize job creation and slow an already mediocre economy - in addition, they would exacerbate the other Social Security crisis.

The other crisis is this: From an investment point of view, Social Security is a scandalously bad deal for American workers. Year after year, they are paying record amounts of money into a system that investors would refer to unambiguously as a “loser.”

This places policy-makers in a Catch-22. If they raise taxes or cut Social Security benefits to eliminate the system’s $9 trillion future deficit - and incur the wrath of taxpayers and retirees in the process - the system they save will be an even worse investment for workers than it is now. On the other hand, if they leave the system alone, or try to improve workers’ rates of return by cutting taxes or increasing benefits, the system will go bankrupt.

There is a way to escape this dilemma: privatization.

Although the idea sounds radical, it is being tried successfully in several countries and would be relatively simple to implement. Younger workers could choose whether to stay in the current system or place most of their payroll tax in a private retirement account that would be invested in stocks, bonds and other income-producing assets. The remainder of the tax would be used to help finance benefits for current retirees and those nearing retirement. When these workers retire, their Social Security account would then be exchanged for an annuity paying a stream of income that would provide far more security than what Social Security now promises.

Older workers who have been participating in Social Security for 20 or 30 years also can benefit from privatization. The simplest approach would be to give them a government bond worth the entire amount they have paid into the Social Security system in payroll taxes, plus interest. This bond would be deposited in their private account, where it would be augmented by private savings and investment income for the worker’s remaining years in the work force.

Alternatively, when older workers retire they could get a monthly check from the government reflecting the amount they put into the system, but the bulk of their retirement income could come from the 20-odd years during which they were allowed to deposit their payroll taxes in a private retirement account. And even though it would not make sense for them, older workers should also be given the choice of keeping the status quo.

Critics will be tempted, no doubt, to attack privatization as a risky, untested idea. Yet, in nations around the world, including Great Britain, Chile, Australia, Mexico and Singapore, policymakers have given their citizens the freedom to opt out of unsound government retirement programs similar to U.S. Social Security in favor of systems based on private savings.

The results have been spectacular: higher levels of retirement income and more old-age security. In Chile, for example, more than 90 percent of workers have chosen the private system. And no wonder: Private retirement accounts will allow Chilean workers to retire with 70 percent of their pre-retirement income. By contrast, because of our Social Security system’s giant deficit, projected payroll taxes will only be sufficient to give American workers 30 percent of their pre- retirement income. Which would you choose?

Although the arguments in favor of privatization grow with each passing day, policy-makers will proceed with great caution. Social Security has long been considered the untouchable “sacred cow” in American politics, and the dishonest “Mediscare” campaign in the last election cycle has probably made the topic even more difficult to address.

Doing nothing, however, guarantees that the baby-boom generation will face a retirement crisis of stupendous proportions. The choice is clear.

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