The Bottom Line

November 25, 1998

Principles that should be at the heart of any Social Security reform:

1. Solvency is not enough.
Workers deserve the best possible deal for their dollar. With Social Security facing a financial crisis-it will begin running a deficit in just 15 years-much of the attention has been focused on ways to keep the program solvent. Theoretically, this could be accomplished by raising taxes or cutting benefits. But Social Security faces a second crisis as well. Young workers will receive a negative rate of return from the program, receiving less in benefits than they pay in taxes. This low return, and other inequities, particularly disadvantages women, the poor, and minorities. Any Social Security reform must reverse this trend, raising the rate of return and providing higher retirement benefits.

2. Individuals, not government, should invest.
The only way to increase Social Security's rate of return is to invest Social Security taxes in real capital assets. This should be done through the creation of individually-owned accounts, not by allowing the government to directly invest payroll taxes. Individual accounts would give workers ownership and control over their retirement funds, allowing them to accumulate wealth, pass that wealth on to their heirs, and would give them a greater stake in the American economic system. Government investment would allow the federal government to become the largest shareholder in every American company, with the potential threat to corporate governance and the specter of "social" investing.

3. Maximize consumer choice.
Workers should be given as wide a range of investment opportunities as possible, consistent with regulatory safeguards against fraud or speculation. While investing in "Singapore derivatives" is clearly not envisioned, there is no reason to limit workers to only 2-3 index funds. As much as possible, the existing retirement savings infrastructure should be utilized, meaning workers would have a large number of safe and secure options. Moreover, a safety net would be provided guaranteeing that no senior would end up in poverty as a result of bad investments.

4. Don't touch Grandma's check.
Benefits to the currently retired and nearly retired should not be reduced. Indeed, by explicitly recognizing benefits owed to current retirees, privatization would guarantee those benefits in a way that the current political system does not. Making the transition to a new system while guaranteeing current benefits means that the government will have to issue debt, cut current spending, or sell assets, but those "transition costs" will be substantially less than the costs of maintaining the current system.

5. More privatization is better than less.
Given the advantages of a privatized Social Security system, there is no excuse for stopping at the privatization of only 2-3 percent of payroll taxes. Once Congress has conceded that private capital investment can provide better and more secure retirement benefits, it should press on and allow workers to control the maximum feasible amount of their retirement income.

Is There a Right to Social Security?

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