All Commentary
Friday, November 1, 1996

Single Policy Change, Double Economic Growth?

Social Security Is a Drag on America's Economy

“Shifting to a pro-savings, pro-investment economic policy can lift the economy over the next few years to a long-term growth rate of 3% or more.”

Business Week, July 8, 1996

The establishment journal Business Week is typically pro-government and skeptical of free markets, but in the July 8, 1996, cover story, “Economic Growth: A Proposal,” it shocked the world by highlighting a single change in a major social program that, they claim, could dramatically increase the U.S. economic growth rate: Convert Social Security to a fully funded pension plan, complete with individual savings accounts. Privatizing Social Security would boost national savings and increase U.S. plant and equipment by 25 percent by 2020. The massive flow of funds into the equity markets would substantially reduce the cost of capital and encourage investment. Business Week’s endorsement of privatized Social Security follows Time magazine’s cover story on March 20, 1995, entitled The Case for Killing Social Security. The article wrote favorably about the Chilean model, which privatized its own Social Security program in 1981.

The Social Security Fraud

Free-market economists have been highly critical of national social insurance ever since the Social Security Act of 1935 was signed into law. Milton Friedman wrote in the early 1960s that Social Security is without justification; he was partly responsible, through his Chicago students, for creating the Chilean model.[1] Twenty-five years ago, New York attorney Abraham Ellis dissected the pay-as-you-go system as conceptually flawed and an offshoot of the something-for-nothing philosophy, the free lunch syndrome.[2]

The continuing crisis of Social Security—growing deficits, higher taxes, poor payouts—has led many policy-makers to seek fundamental reforms. The reforms instituted by the 1983 Commission on Social Security, led, ironically, by Alan Greenspan, are no longer viable. (Oddly enough, Greenspan refused even to consider privatization as an option!) Privatization has grown in popularity as the Chilean private alternative has proven so successful, especially for low-income workers. (See my column, $4,000 from Social Security?, The Freeman, June 1995.) Private worker pensions are particularly popular in Latin America—Peru, Bolivia, and, most recently, Mexico—as well as Great Britain.

Right now, Social Security is a drag on America’s economy. It funnels workers’ savings into consumption—in the form of transfer payments to retirees or into a trust fund which is invested entirely in Treasury securities (thus funding the deficit and government spending). Imagine what the result would be if everyone’s FICA taxes were invested in a true retirement program, into the capital markets instead of consumption? It could turbocharge the U.S. economy, just as it has done in Chile, where the economic growth rate is more than double the U.S. rate. The Cato Institute, a free-market think-tank in Washington, D.C., has been in the forefront of advocating radical reform of Social Security. It has released numerous reports written by pension experts, including Peter Ferrara, William J. Shipman, and José Piñera, the official responsible for establishing Chile’s privatized pension system. Recently, Cato issued a study showing that low-wage workers would gain the most from privatized Social Security. The poor, who rely almost exclusively on Social Security for retirement income, would earn as much as three times the income available under the current system.[3] According to a Cato Institute poll, two-thirds of American voters, and more than three-quarters of young voters, support privatization.

What’s truly amazing is there is wide-ranging support for this kind of positive reform—from the libertarian Cato Institute to the establishment World Bank, from Republican Steve Forbes to Democrat Sam Beard, author of Restoring Hope in America, The Social Security Solution (ICS Press, 1996), which claims that with privatization, the middle class could retire as millionaires. MIT Professor Rudi Dornbusch, no friend of supply-side economics, recently endorsed privatizing Social Security and education as two key sources of growth. The resulting capital formation will support rising real wages and therefore offer a long-term answer to the eroding standard of living.[4]

Ideas have consequences!

1.   Milton Friedman, Capitalism and Freedom (Chicago: University of Chicago, 1962), p. 182.

2.   Abraham Ellis, The Social Security Fraud, 2nd ed. (Irvington-on-Hudson, N.Y.: The Foundation for Economic Education, 1996), pp. 105, 201.

3.   Michael Tanner, Privatizing Social Security: A Big Boost for the Poor, Cato Institute, July 26, 1996.

4.   Rudi Dornbusch, Dole Blew a Chance to Be Bold, Business Week, September 2, 1996.

  • Mark Skousen is a Presidential Fellow at Chapman University, editor of Forecasts & Strategies, and author of over 25 books. He is the former president of FEE and now produces FreedomFest, billed as the world's largest gathering of free minds. Based on his work “The Structure of Production” (NYU Press, 1990), the federal government now publishes a broader, more accurate measure of the economy, Gross Output (GO), every quarter along with GDP.