The Death of Social Security

Debating Bush's plan for private retirement accounts.

James K. Glassman & Tyler Cowen from the April 2005 issue

(Page 2 of 6)

� Allow those under 55 to opt out of the current system by investing up to half of the retirement part of their payroll taxes (which totals roughly 10 percent of pay, including both the employee and employer contributions, for middle-income Americans) in an account with mandatory provisions that would restrict investment choices and require phased withdrawals starting perhaps at age 60 or when sufficient funds are acquired. Otherwise, ownership of the account would be unfettered and would belong to the worker and his heirs. It could be used to buy an annuity or simply provide needed income.

� Reduce, accordingly, the Social Security benefits of those opting out.

As the new system proves successful, gradually allow all former Social Security retirement deductions to go to personal investment accounts and broaden choices for those accounts.

Just before the last election, Investors Action, a new advocacy group that I chair, commissioned Public Opinion Strategies to poll likely voters on their willingness to switch to a system like the one I've described above. Among all voters under age 65, a slight plurality wanted to switch, 49 percent to 46 percent. But among those aged 35 to 44, the margin favoring switchers was significant: 61 percent to 33 percent. Among those under 35, some 64 percent wanted to switch.

Despite Social Security's reputation as the "third rail" of politics, intelligent discussion of the issue has been possible. Such congressional advocates as Rep. Jim Kolbe (R-Ariz.) have called for personal accounts repeatedly and have been elected repeatedly. President Bush said during the last campaign that he backed reform, implying that he supported some form of privatization, although he didn't spell out the details (and still hasn't as of this writing).

Bush evidently understands that Social Security reform could transform politics more broadly. Public Opinion Strategies, in another poll we commissioned after the election, found that investors (defined as people owning stocks or bonds, individually or through mutual funds) voted for Bush over Kerry, 52 percent to 46 percent, while noninvestors voted for Kerry over Bush, 54 percent to 45 percent.

What was striking was that the investor-Bush link remained strong at all income and demographic levels. For example, among those making less than $40,000 a year, a Democratic stronghold, investors were almost evenly split, with 47 percent voting Kerry and 46 percent Bush. But noninvestors voted for Kerry massively, 57 percent to 36 percent.

There's a good case to be made that becoming an investor increases a person's stake in free markets. Reforming Social Security using personal accounts would probably increase the proportion of Americans who are investors from about 50 percent today to about 80 percent in a few years.

Can Americans handle this much freedom? More than two-thirds of Americans (and 83 percent of married Americans) have bought a house--a far more difficult and risky investment than funding, over 40 years, a long-term account split roughly evenly, as I would advise, between stocks and bonds. Social Security treats Americans as children, keeping them in a kind of bondage, beholden to government for no good reason. The opportunity has come, at long last, to break the chains.

Cut the Benefits, Hold the Accounts

Tyler Cowen

We can improve Social Security, but let us opt for a sound transition. Unfortunately, some proposals would restrict liberty and responsibility rather than enhancing them.

I agree with James Glassman's first and second suggestions, namely that we should guarantee benefits for the current elderly and gradually index future benefits to inflation. The latter proposal would cause benefits to rise at a slower rate than otherwise, since current benefits are indexed to wages rather than to prices. It also would suffice to bring the system into future fiscal balance.

But here we begin to differ. Glassman proposes new private but government-regulated accounts. My alternative proposal is simple: Keep the limits on benefits but do not create the new system of accounts.

Of course we already have private accounts, which anyone can, if they wish, hold at Merrill Lynch, Bank of America, or Fidelity. Individuals can save in (relatively) unregulated fashion, and in some cases in tax-free or tax-reduced form (e.g., IRAs and 401(k) plans). It runs counter to both liberty and responsibility to set up a new system of "private" accounts with regulated contributions, investments, and withdrawals. We would end up adding to government involvement in the market economy, not diminishing it.