There are two crises facing Social Security. First the program has a gigantic unfunded liability, largely caused by demographics. Second, the program is a very bad deal for younger workers, making them pay record amounts of tax in exchange for comparatively meager benefits. This video explains how personal accounts can solve both problems, and also notes that nations as varied as Australia, Chile, Sweden, and Hong Kong have implemented this pro-growth reform.
Social Security reform received a good bit of attention in the past two decades. President Clinton openly flirted with the idea, and President Bush explicitly endorsed the concept. But it has faded from the public square in recent years. But this may be about to change. Personal accounts are part of Congressman Paul Ryan’s Roadmap proposal, and recent polls show continued strong support for letting younger workers shift some of their payroll taxes to individual accounts.
Equally important, the American people understand that Social Security’s finances are unsustainable. They may not know specific numbers, but they know politicians have created a house of cards, which is why jokes about the system are so easily understandable.
President Obama thinks the answer is higher taxes, which is hardly a surprise. But making people pay more is hardly an attractive option, unless you’re the type of person who thinks it’s okay to give people a hamburger and charge them for a steak.
Other nations have figured out the right approach. Australia began to implement personal accounts back in the mid-1980s, and the results have been remarkable. The government’s finances are stronger. National saving has increased. But most important, people now can look forward to a safer and more secure retirement. Another great example is Chile, which set up personal accounts in the early 1980s. This interview with Jose Pinera, who designed the Chilean system, is a great summary of why personal accounts are necessary. All told, about 30 nations around the world have set up some form of personal accounts. Even Sweden, which the left usually wants to mimic, has partially privatized its Social Security system.
It also should be noted that personal accounts would be good for growth and competitiveness. Reforming a tax-and-transfer entitlement scheme into a system of private savings will boost jobs by lowering the marginal tax rate on work. Personal accounts also will boost private savings. And Social Security reform will reduce the long-run burden of government spending, something that is desperately needed if we want to avoid the kind of fiscal crisis that is afflicting European welfare states such as Greece.
Last but not least, it is important to understand that personal retirement accounts are not a free lunch. Social Security is a pay-as-you-go system, so if we let younger workers shift their payroll taxes to individual accounts, that means the money won’t be there to pay benefits to current retirees. Fulfilling the government’s promise to those retirees, as well as to older workers who wouldn’t have time to benefit from the new system, will require a lot of money over the next couple of decades, probably more than $5 trillion.
That’s a shocking number, but it’s important to remember that it would be even more expensive to bail out the current system. As I explain at the conclusion of the video, we’re in a deep hole, but it will be easier to climb out if we implement real reform.
Great article Dan. Agreed on all points. Interesting note is Chile’s social security has achieved annualized returns of nearly 10% while the US systems has been less than 2%, not even beating inflation.
I was unaware of Sweden partially privatizing. Interesting.
Dan, wonderfully written. It looks like you made a good research on things. Two thumbs up…
Agreed on all points…
I applaud the free-market sentiment that each of us should be responsible for his or her own Social Security account. But therein lies the problem…our growing culture of “victimhood” and the government’s increasing tendency to step in with bailouts when corporations and individuals face financial difficulty, means that privatizing Social Security could result in even larger government funding problems. One can hear the media and Congressional outcry about how we “must” help irresponsible or simply unlucky investors when they end up retiring with accounts worth less than they contributed. Think about a 5 year market downcycle with millions of people retiring with accounts that are “underwater”. Today we seem to think it is urgent to make people’s home values instantly recover if they own a property that is temporarily worth less than their mortgage. What do you think will happen when their actual retirement income source is worth less than they put in?
It is a faulty premise that every worker can or should enjoy an average of eighteen years of not working after working an average of forty. Yet that is precisely the premise behind social security. In the USA, historically, and throughout most of the world, in the present, most people work until they die. I think it would be superior public policy to dispense with Social Security and the fantasy that everyone will enjoy a retirement.
[...] in big trouble and threaten to wreck the nation’s finances. With regard to Social Security, Dan Mitchell suggests the way to save the program is to let everyone have private [...]
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Dan, when you are talking about Australia’s personal accounts, you mean our Superannuation, right?
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[...] right approach, by the way, is not just cutting benefits, but rather letting younger workers shift their payroll taxes into personal retirement accounts, as explained in this video that was released earlier this [...]
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This is a good video, but you could make a better case if you showed some hard numbers of an individual’s retirement fund if privately invested versus what his/her retirement “fund” would be if “invested” by the government in social security.
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