By
Peter J. Ferrara, special to The BridgeNews
SECTION:
Forum: Viewpoints on the US Social Security system.
WASHINGTON—A
revolution in opinion and policy is sweeping the world regarding retirement
benefits like the U.S. Social Security system. The revolution began
to flower in the South American nation of Chile, which allowed its
workers the freedom to choose a private alternative to its public
system starting in 1981.
In
the private system, workers pay into their own individual savings,
investment and insurance accounts, which are then invested by major
financial institutions to finance future benefits. Within two years,
over 90 percent of workers had switched to the private system, and
the revolution was under way.
CHILE'S
EXPERIENCE was recognized as such a great economic and political success
that other countries around the world began adopting similar reforms.
Today, seven other Latin American countries have enacted similar reforms:
Argentina, Mexico, Peru, Colombia, Bolivia, Uruguay and El Salvador.
But the trend has now spread well beyond Latin America. Similar reforms
have also been adopted in Great Britain, Australia, China, Hungary,
Poland and former states of the Soviet Union. The World Bank has been
promoting such reform across the globe since at least 1994, when it
published a lengthy report entitled, "Averting the Old-Age
Crisis."
IN
THE UNITED STATES, the National Bureau of Economic Research, under
the leadership of Harvard Professor Martin Feldstein, has been advancing
a private savings and investment alternative to Social Security as
well. In the annual address to the American Economics Association
in 1996, Feldstein estimated the future economic benefits to the United
States at a truly astounding $10 trillion to $20 trillion. Other support
for reform reflects a sea change in the politics of Social Security
in this country.
The
members of the 1996 Advisory Commission on Social Security, appointed
by President Clinton, all agreed that some type of new, invested system
was necessary. In 1997, Oregon's liberal Legislature passed a resolution
calling on Congress to grant it a waiver to adopt its own private
option for the people of its state. OPINION POLLS now show two-thirds
to three-fourths of the American people supporting such reform.
Several
members of Congress from both parties have already introduced legislation
providing for various private savings and investment options. And
President Clinton has indicated support for a small personal account
option, as a first step. Reform should be the top priority for Congress
and the president over the coming year, for no other change could
do so much to increase the liberty and prosperity of the American
people.
A
MAJOR private option—adopted now—would avert the long-term
Social Security financial crisis, which would otherwise eventually
require payroll taxes to increase by 50 percent to 100 percent, or
more, to pay promised benefits. But Social Security faces an even
bigger problem than its financing crisis. Even if it somehow pays
all its promised benefits, it has become a bad deal for working people
today, depriving them of the vastly greater prosperity they would
enjoy if they could save and invest their funds through the private
sector instead.
Take
the example of a husband and wife entering the work force in 1985,
both earning the average income each year for their entire careers.
Projections in "A New Deal for Social Security," a new book
from the Cato Institute I wrote with Michael Tanner, show what would
happen if this husband and wife could save and invest in the private
sector what they and their employers would otherwise pay into Social
Security.
AT
A 4 PERCENT real rate of return on investment, which is just over
half the average return earned in the stock market over the last 75
years, the couple would retire with almost $1 million in today's 1998
dollars. That fund would pay them more out of continuing investment
returns alone than Social Security promises but cannot pay, while
allowing them to leave the almost $1 million to their children. Or
the funds could be used to buy an annuity paying them over three times
what Social Security promises but cannot pay.
THE
SAME IS TRUE for all workers today of all income levels, family combinations
and ethnic groups, rich or poor, black or white, married or single,
with children or without. It is equally true for both one-earner and
two-earner couples. Even low-income workers who receive special
subsidies through Social Security could expect several times the benefits
(2.5 to 5.5 times) from personal investment accounts as Social Security
promises but cannot pay.
A
complete private option to Social Security would also do more to reduce
the real national debt than anything else, as it would eventually
eliminate the current $9.5 trillion in unfunded liability for Social
Security benefits. IF REFORM is done right, it would also involve
a major tax cut, as workers and employers would not need to pay as
much into the private system as into Social Security. Finally, all
of this would be accomplished without any reductions in benefits or
changes in Social Security of any sort for today's retirees.
PETER
FERRARA is general counsel and chief economist at Americans for Tax
Reform and a senior fellow at the Cato Institute, both of which are
based in Washington. His views are not necessarily those of Bridge
News.
OPINION
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