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The Independent Institute
Commentary

The Worst Idea Since Government-Run Health Care


Now that the spectacle of impeachment has finally been removed and both Republicans and Democrats appear eager to "return to the business of government," perhaps it is finally time to begin in earnest a discussion of what may be the most pressing issue on the legislative agenda -- the imminent collapse of the Social Security system.

In his first term in office, President Clinton proposed a government takeover of the nation’s health care system, which, as we all remember, the public wisely rejected. The great question of today is whether that same public, now enamoured of the president, will show similar wisdom in rejecting the chief executive’s latest bold plan government ownership of a significant chunk of every public corporation in America, all in the name of "saving" Social Security.

In a great example of Orwellian doublespeak, the administration likes to refer to such a policy as "partial privatization." The President knows, of course, that this attempt to socialize the American economy has little chance of passing. The purpose of the proposal, however, is not to pass, but rather to convince some weak-willed Republicans that so-called partial privatization is a more "moderate" solution to the Social Security crisis than the "radical" approach of true privatization. If enough of these Republicans break ranks egged on by short-sighted Wall Street managers eager to sell a rope to socialists even if it will later be used to hang them then any hopes for true privatization will be lost, and Americans will continue to be stuck with the current bankrupt system.

The government-run social security system is a disaster for young workers. On a present value basis, a young worker can expect a mere 50 cents of benefits for every dollar of taxes paid into the system. In contrast, someone who invested in the S&P 500 over the last 50 years would have earned an average yearly rate of return of 9.5 percent. With statistics like these, it's not surprising that millions of workers save for their retirement by placing earnings in IRAs and private, market-invested pension accounts.

But would any of these workers voluntarily give their accounts over to the government to invest? It seems unlikely. So why should these same individuals want the government to "invest" their Social Security taxes? True privatization expands the market for private pensions by eliminating Social Security taxes and letting individuals invest their own savings as they see fit.

Replacing the current system with privately owned pensions has benefits beyond the higher returns available in the stock market. The arcane rules governing Social Security ensure that, for most workers, there is little connection between what they initially pay in taxes and what they eventually take out in benefits. In addition to reducing the incentive to work, the resulting system wealth redistributes wealth in unintended ways, which are difficult to defend.

For example, why should two singles pay more of the Social Security burden than a married couple with the same total income? Would the taxpayers vote for such redistribution if they knew of its existence? Probably not. Yet calculations by Eugene Steurle of the Urban Institute show that Social Security imposes a burden on singles more than three times as high as the burden imposed on the married couple. (On a present value basis, young singles and young married couples of average income will both pay hundreds of thousands of dollars more in taxes than they will ever receive in Social Security benefits.) Arbitrary wealth redistribution is not an accident of the current system; it is an almost inevitable result of any system in which workers don't own their savings.

Some opponents of privatization recognize that it offers workers much higher rates of return over the long run, but they worry that a market drop could "devastate" a worker on the verge of retirement. No one wants to wake up on their 65th birthday to find that their nest egg has dropped in value by 20 percent. But in a paper for the Cato Institute, Melissa Hieger and William Shipman calculate that, even if a worker were unlucky enough to withdraw his lifetime savings on the day of a terrible market crash, the chance that his total return would be lower than that offered by Social Security is close to zero. Even more fundamentally, the tragic figure of the Black Monday retiree is absurd. Why would anyone liquidate all their savings on a single day, especially on a day like Black Monday?

To avoid precipitous declines, investors in a privatized system can do what most financial experts advise and slowly reduce the percentage of their assets held in stocks as they near retirement. Market risks can be managed through a judicious choice of financial instruments. But what can current workers do to avoid the risk that politicians will raise their payroll taxes, cut their future benefits, or raise the retirement age? Politicians who claim that Social Security benefits are risk-free are selling stock in a more fraudulent enterprise than any the SEC would tolerate.

Defenders of the current system like to refer to Social Security taxes as "contributions" which "accumulate," thereby creating the worker's "pension savings." Of course, all this is nonsense. With the exception of a small surplus, all of the revenues from Social Security taxes are immediately paid out to current retirees. Real privatization, however, will increase national savings. Economist Martin Feldstein of Harvard University estimates that the higher savings of a privatized system, plus the elimination of inefficient payroll taxes, could increase national wealth by $10 to $20 trillion. No other policy promises anything like the increase in living standards made possible by a privatized social security system.

Ironically, it is "partial" privatization meaning government investment in the stock market which is the radical way to "mend" the current system. True privatization through private ownership of individual savings accounts is already the norm for millions of Americans. Expanding the American system of private pension accounts is thus the moderate, sensible, and wise approach to mending Social Security.


Alexander Tabarrok is Senior Fellow at The Independent Institute, Assistant Editor of The Independent Review, and Associate Professor of Economics at George Mason University. He received his Ph.D. in economics from George Mason University, and he has taught at the University of Virginia and Ball State University. Dr. Tabarrok is the editor of The Independent Institute books, Entrepreneurial Economics (Oxford University Press), The Voluntary City (with David Beito and Peter Gordon, University of Michigan Press), and Changing the Guard: Private Prisons and the Control of Crime.

This article appeared in the Salem Evening News and more than a dozen other papers in February 1999.

From Alexander T. Tabarrok
JUDGE AND JURY: American Tort Law on Trial
The fear of litigation reduces innovation, drive physicians and manufacturers out of lawsuit-prone specialties, and increase manufacturing and consumer costs. In the courts, data from thousands of cases all over the country demonstrate that tort system awards are driven by political factors such as judicial elections, jury compositions, and the location of courts themselves.