A Plan For Privatizing Social Security
By Peter J. Ferrara
Peter Ferrara is general counsel and chief economist at Americans for Tax Reform and an Associate Scholar of the Cato Institute.
Executive Summary
As Social Security’s problems become more apparent, there is growing
support for the concept of privatizing the retirement program. As the debate
grows it becomes more important to move beyond generalizations and provide detailed
proposals for how such privatization can be accomplished. Without endorsing
any specific proposal, the Cato Project on Social Security Privatization will
present a number of possible privatization scenarios.
In this study, Peter Ferrara offers a proposal based on the following key
elements:
- Current workers could be free to choose either the private option or Social
Security. For those who choose the private plan, workers and employers will
each pay 5 percent of wages, instead of the current Social Security payroll
tax of 6.2 percent for each, into private investment accounts, resulting in
an eventual payroll tax cut of 20 percent. Besides supporting retirement benefits,
the accounts would finance private life and disability insurance, thus replacing
Social Security survivors and disability benefits.
- Workers who opt out of the current Social Security system would receive
recognition bonds from the federal government that would pay them a proportion
of future Social Security benefits equal to the proportion of lifetime taxes
they had already paid.
- Benefits promised to current retirees would be paid in full, with no reduction
of any kind.
The biggest objection to privatizing Social Security has been the transition
to a privatized system. But the projections of the fiscal impact of the plan
offered in this study show that the transition can be financed without new taxes
and without cutting benefits for today’s recipients.
Indeed, the yearly transition deficit would be offset after about 14 years.
After that, the privatization reform actually starts producing a surplus for
the federal government. About 20 years after the reform is begun, that surplus
would be large enough in 1996 dollars to eliminate completely a federal deficit
as large as today’s.
These projections place the transition in a whole new perspective. They show
that the transition is financially feasible and manageable, and that modest
short-term sacrifices would lead to long-term surpluses that would ultimately
reduce the federal budget deficit.
Index of Social Security Choice Papers
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