FREE ESSAY ON SOCIAL SECURITY PRIVITIZATION

SOCIAL SECURITY PRIVITIZATION

SOCIAL SECURITY PRIVATIZATION
Christian De Church
Professor Zeck
Micro-Economics
When President John F. Kennedy said Americans would be the first to walk on the moon,
incompetent people said it could not be done. NASA's technology lagged years behind
Russia's and the Russians never did put a man on the moon. But Neil Armstrong's one small
step made the dream reality. When it comes to visionary social policy, beware of those
incompetent people who would reject a great plan simply because it means doing something
for the first time.
Take the farsighted idea of transforming our troubled Social Security system into a
system of personal accounts. Conservative estimates show that workers who invested their
payroll taxes in personal accounts would get 3 to 5 times more retirement income than
Social Security provides
(http://www.socialsecurity.org/pubs/articles/dao-12-02-98.html).
The Cato Institute has a long history of seeking alternatives to the current Social
Security system. Since 
1979 the Cato Institute has published more than 40 books, articles, and reports outlining
the program's problems and crafting innovative policy solutions. Founded in 1977, the
Cato Institute is a nonpartisan public policy research foundation headquartered in
Washington D.C. The Institute is named for Cato's Letters, libertarian pamphlets that
helped lay the philosophical foundation for the American Revolution
(http://www.cato.org/about/about.html). The Cato experts examine the problems facing our
current system, the methods that can be used to move towards a system of personal
retirement accounts, and the effects that a new system would have on American workers
(http://www.socialsecurity.org/about/about.html). On August 14, 1995 the Cato Institute
launched its Project on Social Security Privatization, the largest undertaking in the
organization's history. The objective of the project is to formulate a viable blueprint
for privatizing the Social Security system. Rather than paying taxes into a
government-owned fund, workers should be allowed to redirect their payroll taxes into
individually owned, privately invested accounts, similar to 401(k) plans and Individual
Retirement Accounts (IRA). But skeptics, fearful of change, have attempted to smother the
infant in the crib by latching onto the issue of the administrative costs. Imagine, they
say, the logistical nightmare, the paperwork, of managing 140 million individual
accounts. "No system to date has the capacity to administer such a system," said the
Employee Benefit Research Institute. To be sure, no one knows exactly what the costs will
be, but we have plenty of experience with a variety of retirement programs that indicates
that we have no need to worry
(http://www.socialsecurity.org/pubs/articles/dao-12-02-98.html). Rockets scientists did
not know exactly how to put a man on the moon in 1965 either, but it did not take them
very long to figure it out. Economic and financial experts have the knowledge,
experience, and foresight to overcome the hurdles that are inevitable with any new
programs.
This current system is acting as a drag on economic growth in two important ways. First,
the payroll tax distorts the supply of labor and the type of compensation sought by
workers. These losses are inevitable because of the low return implied by the
pay-as-you-go character of the unfolded Social Security system. Second, the system
reduces national savings and investment. But even if Social Security's financial
difficulties could be fixed by raising taxes or cutting benefits, the system would still
need to be reformed because it is a bad deal for most Americans. Social Security simply
costs too much and pays too little. Social Security's rate of return on payroll taxes is
a dismal 2 percent and declining (http://www.socialsecurity.org/faqs.html).
Privatizing Social Security, transforming it from an unfolded pay-as-you-go system to a
system of private savings accounts, would solve both of these problems and increase
economic growth. Conservative assumptions imply that Social Security privatization would
raise the well being of future generations by an amount equal to 5 percent of gross
domestic product (GDP) each year as long as the system lasts. Although the transition to
a funded system would involve economic as well as political costs, the net present value
of the gain would be as much as $10-20 trillion
(http://www.socialsecurity.org/pubs/ssps/ssp7es.html).
Women are known to be disproportionately dependent on Social Security benefits in their
old age and because of longer life expectancy and employment patterns, an elderly woman
is twice as likely to be living in poverty as is an elderly man. Although the Social
Security system is gender neutral on its face, it produces some financial outcomes that
place women at a disadvantage in retirement compared with men. The employment patterns of
women, characterized by fewer years in the labor force, lower earnings, and more frequent
job changes, translate into lower Social Security benefits. The dual-entitlement rules of
the system often impose a penalty on wives and widows of two-income couples. The loss of
up to 50 percent of a couple's benefits at the husband's death throws every fifth widow
into poverty. The privatization system in fact would offer tangible financial benefits to
women because the higher rates of return would boost the retirement savings.
(http://www.socialsecurity.org/pubs/ssps/ssp12es.html)
Middle Class America would enjoy the higher retirement benefit, improved economy, and
personal ownership of a personalized retirement account. For example, take Middle Class
Mike who is a thirty-five-year-old union worker who makes about $33,200, which is the
average salary for a union worker. He can expect just $1,559 from Social Security. In a
system of personal retirement accounts, Middle Class Mike would enjoy an account of $411,
052 with a 5.75 percent rate of return (http://www.socialsecurity.org/faqs.html). Low
wage workers will also benefit from the personalized accounts with their minimum wage
earnings. Low wage Larry, in a system of personal retirement accounts, is a 28-year-old
earning $13,500 a year. He would get just $815 from Social Security but would receive
$2,292 if he invested in a mixed personal fund that would earn a 5.75 percent return
(http://www.socialsecurity.org/faqs.html). 
In Conclusion, Privatizing Social Security would lead to an increase in national saving,
with hundreds of billions of dollars invested through individual accounts every year.
Those investments, in turn, would substantially increase national investments,
productivity, wages, jobs, and overall economic growth. In addition, privatizing Social
Security would amount to an effective cut in payroll taxes, boosting productivity, and
employment.
Works Cited
1) "It Can Be Done." Social Security. Online. Available:
http://www.socialsecurity.org/pubs/articles/dao-12-02-98.html. April 3, 2000.
2) "About the Cato Institute." Online. Available: http://www.cato.org.about/about/.html.
April 11, 2000.
3) "The $10 Trillion Opportunity." Online. Available:
http://www.socialsecurity.org/pubs/ssps/ssp7es.html. April 3, 2000.
4) "FAQ's About Privatization." Online. Available:
http://www.socialsecurity.org/faqshtml. April 3, 2000
5) "The benefits of Social Security for Women." Online. Available:
http://www.socialsecurity.org/pubs/ssps/ssp12es.html. April 3, 2000