August 18, 1999

A Poor Excuse for Opposing Privatization

by Andrew Biggs

Andrew Biggs is a Social Security analyst with the Cato Institute.

Opponents of Social Security privatization argue that letting individuals invest their payroll taxes would enrich the well-to-do while leaving the poor behind. "It's obvious that poor workers and their children would not do better under a privatized Social Security scheme," claims Sharon Daly of Catholic Charities. Liberal activist Peter Barnes says that "Social Security isn't so much a government program as it is a compact between generations -- an extension of family values to the nation at large. This compact vows that each generation, as it ages, will be supported by the generation it raised. No one who has labored will die in poverty." Even Republican Congressman Bill Archer calls Social Security "the country's greatest anti-poverty program."

Notwithstanding the fact that a compact requires agreement -- and I don't recall agreeing to fork over an eighth of my income to a program that won't pay it back -- Social Security has left unkept the promises made for it. Contrast the lofty rhetoric with this reality: despite Social Security, 10.5 percent of Americans over 65, 3.4 million in all, live below the poverty line of $8,480, according to the Bureau of the Census. Poverty afflicts 23.8 percent of older Hispanics and 26 percent of blacks. After 2014, as Social Security's insolvency forces tax increases and benefit cuts, the plight of low-income retirees will worsen. If Social Security is America's greatest anti-poverty program, why are millions of seniors dying in poverty?

Defenders of the status quo counter that, lacking Social Security, even more seniors would be indigent. But that assumes that Social Security comes for free. Social Security isn't supposed to be a welfare program -- Americans receiving benefits paid into the system while working. They have a right to ask what they are getting for their money and why, despite a lifetime of payroll tax contributions, millions die destitute.

Opponents of privatization reply that Social Security is but one leg of a three-legged stool, with employer-sponsored pensions and private savings completing retirement provisions. But that is a cop-out. As Social Security payroll taxes have risen -- from 2 percent of the first $3,000 of wages at the program's inception to 12.4 percent of the first $72,600 today -- personal savings have been crowded out and seniors have become ever more reliant on Social Security.

In the July/August issue of the American Prospect, David Callahan points out the obvious: "America's social insurance system for the elderly today faces two major problems: it may be heading toward fiscal crisis if economic growth slows and, at the same time, it does not offer adequate protection to low-income elders against poverty and even hunger." So long as Social Security retains its pay-as-you-go financing, it is impossible to maintain benefits without raising taxes. Increasing benefits is almost out of the question. But it doesn't have to be this way.

There is one solution that addresses the dual problems of inadequate benefits and looming insolvency: privatization. Retirement security, even for the poorest working Americans, need not depend on charity from others or welfare from the government. All that is required is a system that saves rather than spends, that gives Americans the option of personal retirement accounts funded out of their payroll taxes. Personal investment would eradicate poverty in retirement, and give workers control over their retirement savings and the security that comes from owning an asset that cannot be cut or taken away.

Hence, the question is not what the poverty rate would be for America's elderly without Social Security. It is what it would be were workers allowed to invest through personal accounts. A minimum-wage worker investing only the retirement portion of his payroll taxes in a mutual fund returning the stock market average since 1800 would amass, after 45 years, savings of $358,000 (in 1999 dollars). Interest income alone could provide him a monthly income of almost $1,200, leaving the principal untouched for his heirs. Social Security, by contrast, would pay around $750. That is not to say that a person living near the poverty line doesn't need help. But Social Security is the kind of help he doesn't need.

A private pension manger who took 12.4 percent of a worker's wages and left him in poverty might well find himself in jail. For a mandatory government program to do so is an injustice. By that standard, Social Security has manifestly failed. It is time to give something better a try.