The Senescent Man

Public debate on the future of Social Security has begun, and it has been presented by both sides in heated ideological and political terms. There is, in addition, an economic case against Social Security that recognizes its strengths and weaknesses and suggests ways to repair and improve it....

...Criticism of the present system is directed at the pension benefit and at the level of Social Security taxes.

[Today's Social Security system] pension is not owned by the worker. It is not part of the worker's estate, and cannot be left to the worker's heirs at death. If the worker dies before retirement, accumulated contributions cannot be claimed by the worker's heirs. Both of my parents worked all of their lives and paid Social Security taxes. Both died before they reached the age of retirement. Had those funds been saved in a private retirement account, ownership could have passed to their children and grandchildren. As it was, the system retained the funds.

A[n improved] Social Security pension [would be] a great boon to those who live long beyond the age of retirement.

Can privatization save Social Security? Not by itself. Privatization would permit workers to reduce their Social Security taxes by a small fraction and divert the funds into the security markets. This would reduce the money that the Trust Fund has available to support existing retirees. The Trust Fund would therefore run dry faster than the 45 years currently projected, and there would be a more immediate need to raise taxes or reduce future benefits.

Countering that, there would ultimately be a reduction in the future pension liabilities of the Trust Fund. Corresponding to the taxes diverted today would be a reduction in the Trust Fund's obligation to the workers who had taken advantage of privatization.

What privatization does is give the worker a wider range of choice for investment of his or her savings. At the moment, those savings are for the most part paid as Social Security pensions to current retirees. Under privatization, workers would have investment choices currently enjoyed by government employees but now denied to the mass of workers. Their retirement savings would automatically become part of their estate, and not be subject to double taxation.

Note, moreover, that privatization would not be compulsory. Nor would it force any worker who privatized to give up the other benefits of the Social Security system. Indeed, the worker who privatized would retain the right to claim a Social Security pension at retirement, suitably reduced to correspond to his reduced level of contributions.

Those workers who fear placing their funds in common stock would have opportunities to invest in corporate as well as government bonds. Moreover,the management structure of the Federal Employees Retirement System shows that such funds can be managed conservatively and efficiently, at low cost.

Privatization would not save Social Security by itself. It is a lifeboat to those who wish to leave the system in case the political parties are too deadlocked to agree on lower benefits or higher taxes. Even if agreement is reached, privatization would benefit substantial numbers of workers now getting a bad deal from the system.