Reforming Social Security
A New Deal for Social
Security, Peter J.
Ferrara and Michael Tanner, Cato Institute, 1998. 265 pages, $10.95 paperback;
http://www.cato.org/
The current bull market swells the
coffers of IRAs and other retirement accounts. At the same time, Social Security
is heading for bankruptcy. Peter Ferrara, an economist for Americans for Tax
Reform, and Michael Tanner, a policy analyst at the Cato Institute, explain why
Social Security is going broke, why a system of private retirement accounts
should replace it, and how to get from here to there.
Visible and Invisible
Costs
Social Security's Board of Trustees
projects that the program will start to run a deficit by 2013, though it could
start even sooner. The problem, in simple demographic terms, is this: more
retirees, living longer, will require more support from a relatively unchanging
number of workers.
According to the "medium case"
official scenario, paying all the promised benefits for a young person entering
the workforce today would require increasing the Social Security payroll tax
rate from 12.4 percent to approximately 18 percent. Under the pessimistic (and
more realistic) projection, the payroll tax rate would rise to 26 percent.
Without a tax rate increase, benefits would have to be cut anywhere from 25 to
33 percent.
Social Security--a foundation of
FDR's New Deal--is actually a very poor deal. Even under the most favorable
conditions, Social Security gives a 2 percent "return" on taxes paid. By
contrast, private capital markets have averaged, on an annual basis, a 9 percent
return after inflation. A worker contributing an equivalent amount to a true
investment account would receive at retirement at least twice the income
provided by Social Security.
Ferrara and Tanner provide many
detailed scenarios to illustrate that minimum-wage workers, blacks, women who
work outside the home, stay-at-home moms, and others would fare better under a
system of private investments.
Social Security's tax is much
greater than what shows up on the pay stub. Over a lifetime, Social Security
robs the average family of over $1 million--about three times the benefits of
Social Security. It's not surprising then, that the current arrangement
decreases GDP anywhere from 5 to 10 percent. The formula is brief: higher taxes,
lower savings, less investment, slower economic growth.
But the case against Social Security
cannot be measured in monetary terms alone. Social Security, a system born in
political manipulation (described in graphic detail in chapter 2), breeds
cynicism with its language of a (bogus) trust fund and forced "contributions."
It fosters an attitude of dependency among workers. By crowding out private
savings, it robs many people of the chance to become "capitalists" through
ownership investments--and leads to needless and unproductive confrontations
between labor and management.
Lessons from
Overseas
Having explained why Social Security
is a bad (and unsustainable) deal, Ferrara and Tanner describe how Chile, Great
Britain, and other countries (including China!) are, to varying degrees, turning
to a fully funded system of private accounts.
In Chile, employers withhold a
portion of worker's pay, and send that to investment companies that have met
standards of good management. The government pays, out of general revenues, a
modest stipend to those individuals whose accounts fail to provide adequate
income. In its 17 years of operation, the Chilean program has provided the
typical retiree twice the income of his U.S. counterpart on Social Security--and
at a lower cost.
Ferrara and Tanner also outline
their preferred method of getting to a new system. They propose letting worker
and employer each pay 5 percentage points of the current Social Security tax
into a private account, with the balance continuing, for 10 years, to pay for
the transition costs.
This is a thorough, and thoughtful,
book. The authors do not simply present their facts and arguments, but they
consider, and refute, the objections: that Social Security is a good deal, that
a system of private accounts is undesirable, and that the current system can be
fixed with only a minor tax increase. It is not light reading, but neither is it
off-limits to the average reader.
For those who will be affected by
Social Security--and that includes almost everyone who has ever earned
income--this book is worth reading, if only to find out how yet another
noble-sounding government program undermines the goals it publicly supports.
Published in the March /Aprl 1999
edition of Intellectual
Ammunition.