Will Retirement Become a Personal Responsibility?

Social Security Must Ultimately Be Privatized

With Social Security benefits projected to exceed the system’s revenues within 15 years, young Americans are increasingly skeptical that the government will take care of them when they reach their mid-sixties. That’s a healthy development because in a free society, responsibility for one’s retirement is too important to relinquish to the vagaries of politicized programs.

A recent report from the Board of Trustees of the Social Security Trust Fund projected that payroll tax revenues alone will be insufficient to pay current benefits as early as the year 2012. The system can draw upon its revenues plus interest on the surpluses of previous years for a while longer, but when that’s all gone, we’ll be staring gargantuan tax hikes in the face. Without cutting benefits, the trustees estimate that payroll taxes would have to quickly rise from the current 12.4 percent to a whopping 18.8 percent.

Of course, don’t rule out the prospect of a reduction in benefits, which might come in one or more disguises such as raising the age at which one can begin collecting checks. This much is clear: trusting to politicians to take care of you in your old age is costly, unpredictable, and therefore dangerous. Those who warned of this when the system was established in 1935 were pilloried as heartless and stingy but they now look like the wisest prophets of their day. It’s too bad many of them are not around in 1997 to help us untangle the mess they foretold.

As a solution, advocates of the privatization of Social Security often point to Chile’s remarkable success in that very endeavor. But Americans need not look any further than Great Britain for some of the same lessons. British workers, optimistic about how they’ll fare in their senior years, are relishing the prospect of a pool of pension funds greater than that of all other European countries combined.

Why do the British have far less anxiety about their financial future than their American counterparts? They are not, as a Heritage Foundation report recently pointed out, “locked into a rigid, financially troubled government-run system.” A few years ago, Britain partially privatized its retirement program, allowing workers to invest a portion of their payroll taxes in private pension funds. While Americans are not permitted to invest any amount of their 12.4 percent Social Security payroll tax in private equities or retirement plans, three-quarters of all British workers are enrolled in private plans through their payroll taxes.

Since 1986, Britons have been earning double-digit rates on their retirement funds while today’s young working Americans must hope to live well beyond the age of 100 before their “investment” in Social Security begins to pay off. What’s good for the workers is good for the Treasury as well. The Heritage Foundation report, “Social Security Privatization in Britain: Key Lessons for Reformers,” says that by restructuring and privatizing their pension system, allowing consumer choice and competition among private pension plans, and controlling entitlement spending, the British have amassed a pool of financial assets (or capital) second only to the United States and Japan. Officials are even predicting that at the rate things are going, Britain will pay off its entire national debt by the year 2030!

While both Chile and Britain are valuable models, Americans have domestic examples to learn from. Three counties in Texas had the good sense to get out from under the Social Security pyramid scam years ago.

A loophole in the original Social Security law allowed municipalities the freedom to opt out, an escape hatch Congress closed in 1983. Three Texas counties took advantage of it while it was in effect and as a result, retirees under the private plans in use there are getting several times the monthly retirement check they would have received had they stayed in the government system. Recently, the Oregon legislature overwhelmingly passed a resolution calling on the federal government to allow states to get out of Social Security.

Of course, those who worship government, and who think that you and I can’t be trusted to take care of ourselves, are working their PR machine overtime to preserve the precarious status quo. A new study from the Cato Institute, however, is giving the privatization side plenty of ammunition with which to rebut the statists.

Would putting your retirement nest egg in the private sector be too risky? The Cato report, “Common Sense Objections to a Market-Based Social Security System: A Response,” shows that even if a worker invested his payroll taxes during the stock market’s worst performing quarters in history, he could still retire better with private savings than with Social Security. Over the last 70 years, a period that includes the biggest stock crashes in history, stocks and bonds have averaged an annual rate of return of over nine percent—far in excess of the average annual Social Security return of a paltry two percent.

Would paying the cost of private pension fund management make the idea too expensive? It’s true that the government spends less to manage Social Security monies than private firms spend to manage their assets, but that’s because the government invests poorly in its own low-paying securities. You get what you pay for. Paying private managers to generate a far higher return is a good investment, pure and simple.

While it is encouraging to see privatization of Social Security become a genuine topic of wide discussion, every plan put forth so far retains a core element of compulsion. “A privatized system,” writes one prominent limited-government advocate, “should require a mandatory contribution to ensure that those opting out of Social Security are actually saving money for their retirement.” It’s a sad commentary on the many decades of increasing reliance on government that even many friends of freedom believe that Americans might not save if the government didn’t order them to.

Social Security, make no mistake about it, will ultimately be privatized partially or wholly. America will not forever lag behind Chile and Britain just so it can maintain an antiquated and politicized pension system that’s headed for bankruptcy. It’s time that Americans take back a responsibility they should never have trusted to government in the first place, one way or another, the sooner the better.

More by Lawrence W. Reed