Fully Private Social Security (2010 Sep)

by Barry A. Liebling

The expression “the cure is worse than the disease” is a cliche precisely because there are so many instances of people trying to fix problems but making things worse. Of course, the challenge is to spot bad cures in advance.

Recently President Obama gave a speech on the 75th anniversary of Social Security. He warned his audience that if the Republicans gain the upper hand in congress they will attempt to privatize it. He said, “I’ll fight with everything I’ve got to stop those who would gamble your Social Security on Wall Street.”

The significance of President Obama’s speech is twofold. He knows that Social Security is very popular, especially among voters who are or will soon be collecting benefits. The President understands that to someone who has been paying Social Security taxes for many years the prospect of losing the benefits that have been promised is repugnant. He is daring Republicans to make an issue out of Social Security because he believes this is a fight he can win.

More important the President knows that Social Security has great symbolic value. It is a cornerstone of the leftist, progressive agenda – a monument to the notion that the federal government should control the retirement finances of the American people. A statist who is in love with government power views Social Security as sacrosanct. This is true not only because it tampers with the lives of most working people, but also because as long as Social Security exists it can be used as a rationalization for yet more government intrusions. If we can have Social Security why not another meddlesome program?

The correct response to President Obama’s challenge, which may or may not be recognized by Republicans, is that Social Security should be fully privatized. Proponents of privatization have pointed out that Social Security is like a Ponzi scheme and is heading for disaster. It is not “sustainable” because as more people retire they will be supported by fewer workers, and the program will run out of money in the near future. But the sustainability of Social Security is not the essential reason to privatize it. If it were Social Security could be fixed by belt-tightening – for example, reducing benefits for most people, eliminating benefits altogether for “rich people,” and raising the retirement age.

The principled rationale for privatizing Social Security is that it is a step in the right direction of putting Americans in charge of their own lives and of getting government (which is essential for protecting individual rights) out of an area it should not be in.

What would the successful privatization of Social Security look like? It would have to be gentle on Americans who have already paid into Social Security and it would have to completely eliminate inappropriate government involvement. Here are three points.

First, American’s who have paid into Social Security and are expecting to collect benefits must be assured that they will get what they were promised.

No one should be kicked out who does not want to go. This means that privatization must be done incrementally and must be attractive to American workers. Shedding the government program will be easiest for younger workers who will have the option of investing some of their Social Security taxes into private investment accounts. Over time the proportion of taxes that can be diverted to private accounts will increase until finally there is no tax at all – just money put away into personal retirement investments.

Second, the government should not get involved in how the retirement money is invested.

Proponents of Social Security privatization have commented that conservative investments in the stock market – over time – will yield higher returns than what Social Security promises. They are probably correct, but beware – allowing the government to decide what counts as an appropriate investment is an invitation to calamity. If the government gave its stamp of approval on where “private retirement accounts” could invest it would become the de facto largest investor in the country. Think of the opportunities for political mischief. For example, would General Motors and Citigroup (both partially government owned) be given the green light for retirement investments? Would the government approve retirement investments in companies that are not sufficiently unionized, green, or owned by ethnic minorities?

The way to fully privatize Social Security is to allow Americans to invest their retirement funds as they wish. There will be no shortage of expert financial advisors eager to help clients find prudent investments. And here the government has a legitimate role in assuring that the client-advisor relationship is free of force and fraud.

Third, the government should not guarantee any private investments.

Some advocates of privatizing Social Security have suggested that the government should guarantee that privately invested funds will be at least as valuable as what traditional Social Security promises. This introduces great moral hazard. Retirement investors who believe the government will bail them out if they make poor decisions will be less inclined to be careful. Why not go for the long-shot high-yield investment if the worst that can happen is the government bails me out?

There is a proper way to assure that private retirement investments pay off in the end – private insurance. Workers would have the option to purchase insurance – from any company that offers it – that their investment grows over time. Of course, insurance companies will charge higher premiums for portfolios with riskier investments. Conversely, it will be possible to keep the cost of insurance low if the investments are conservative and prudent. Notice that under this scenario each person would have the power to decide how much risk to take on.

The problem is getting the government out of the retirement business painlessly. The danger is that having the government manage private investments will make things worse.

*** See other entries at AlertMindPublishing.com in “Monthly Columns.” ***

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