At retirement, workers can use their accounts to purchase an annuity or they can let the account continue to build value, making periodic withdrawals as needed. The government does guarantee a minimum benefit that's based on the minimum wage. If a pension account can't cover that benefit, the difference is made up out of general revenue.
The NCPA report authored by Goodman, Ferrara, and Matthews reports astounding results. The funds have earned, on average, a 13 percent rate of return above inflation, and the national savings rate now exceeds 25 percent. And even though payroll taxes are 60 percent lower now than they were before 1981, retirement benefits under the private system are 70 percent higher in real terms than those the government plan offered.
What about those workers nearing retirement who have paid payroll taxes for years in the now-shrinking government system, an unfunded liability of nearly $7 trillion in the United States? The Chileans established a new debt instrument, known as recognition bonds. These are interest-bearing bonds of amounts that vary with how much each individual had put into the old system. The value of the bond is added to each person's individual account at retirement.
Goodman and Ferrara, among others, have cited some problems with the Chilean approach--most notably the rather strict government regulations on how people can invest their retirement savings. But the overall outline has gained adherents on and off Capitol Hill. When freshman Rep. Mark Sanford (R-S.C.) visited Chile on a trade mission in 1995, he returned singing the praises of its social security plan. While he hasn't recommended a proposal along the lines of the Chilean program, he remains interested in major Social Security reforms.
Former Sen. Malcolm Wallop (R-Wyo.), a member of the entitlement commission and chairman of Frontiers of Freedom, is pushing reforms along the Chilean outline, emphasizing the establishment of a property right for workers' retirement contributions and suggesting the sale of federal lands and other assets to finance the recognition bonds. And Ferrara, who had previously pushed a two-tiered system, now prefers a stock-and-bond approach. He is developing (but has not yet completed) his own proposal for the Cato Institute. Two advantages Ferrara sees in the Chilean approach are that it gives individuals control over their own retirement investments and that the recognition bonds "let people get some of their money back."
The potential weakness of the Chilean approach is political: It doesn't offer a stream of tax dollars to pay for current retirees and those near retirement age--a tough sell to people older than 50. University of Nebraska economist Karl Borden has proposed a detailed hybrid plan that could offset some of this political opposition by offering some of the strongest features of both approaches. Outlined in a Cato Institute paper, Borden's plan would let workers stay in the current system, with the understanding that their benefits could be reduced, or join the private system. The private plan would invest all payroll taxes in tax-deferred personal retirement accounts. Individuals could also add as much as 25 percent of their incomes a year into these PRAs, which would then be used to purchase stocks, bonds, or mutual funds.
PRA funds would be divided into "basic" and "enhanced" accounts. Money would accumulate in the basic account until the account could purchase an annuity that would provide 110 percent of an annual minimum-wage income through retirement. The basic account could only be invested in a limited number of "safe" investments. After accumulating that amount, the rest of the PRA could be invested in any financial security.
Borden's plan would also establish a recognition bond based on the present value of the estimated retirement benefit the Social Security Administration calculates for every worker today. Each person would get a bond, which would be deposited in your PRA. Bond holders could wait and hope that there will be enough money in the treasury to redeem their bonds when they mature, or they could sell the bonds on secondary markets. If confidence in the government's solvency is low, people might only get a few cents on the dollar for their bonds. But something beats nothing. The Borden proposal may be too complicated to sell politically. But others will no doubt emerge.
ATR's Grover Norquist has mapped out a possible timetable for privatization. He's urging Republicans to drive a stake through the heart of Washington's social engineers by making a flat income tax the campaign issue of 1996. If the GOP wins the White House and increases its majorities in Congress, he says, the party can spend 1997 on tax and regulatory reform. After the 1998 mid-term elections (in which he predicts even bigger Republican majorities), the Republicans could then turn to Social Security in 1999.
An overly ambitious scenario? Perhaps. But even if Clinton is re-elected, ATR's Jim Lucier thinks the move towards privatization will continue. After all, the most prominent advocate of partial privatization is former Democratic presidential candidate Kerrey. And he's not alone in his party: At a Concord Coalition-sponsored "entitlement summit" in Fresno last August, Rep. Cal Dooley (D-Calif.) suggested converting Social Security into a genuine social-insurance program. People purchase insurance to protect themselves from unexpected events, he said. Living until retirement age is something people expect to do. Dooley suggested at least partially privatizing the retirement portion of Social Security's old-age and disability program, which amounts to 11.2 percentage points of the 12.4 percent payroll tax.
As a lame duck, Clinton might embrace a proposal along the lines of the Kerrey plan. If Democrats open with a mild privatization proposal, Republicans could easily raise the stakes. Once the policy debate focuses on which privatized plan to adopt, Goodman says the free-marketeers will have won. "Once there's a broad consensus about privatization," he says, "you can argue over the details."
The Concord Coalition's Coupenas says there's no time like the present to start this debate. "If it does take five or six years" to implement reforms, he says, "who knows what other problems we may face?" A recession, war, or other financial troubles could derail entitlement reforms. "The longer we wait," he says, "the tougher it is to solve the problem."
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