A revolution in Social Security is sweeping the world. From Latin America to East Asia to Eastern and Western Europe, workers are winning the freedom to choose to save and invest their money in their own private, individual, investment and insurance accounts in place of old fashioned government Social Security systems. As a result, benefits for retirees are secured, while today\’s young workers are earning far higher returns and benefits for their future. Moreover, soaring savings and investment through the private system is producing booming economies for working people today, with higher wages and more jobs.

This revolution is coming to America. Polls show that working people in the U.S. overwhelmingly want the same freedom and prosperity that other workers around the world are enjoying through such reform. Leading economists and financial institutions are urging the U.S. to adopt such reform as well. And several leading political figures in both parties are now proposing at least a partial private option for today\’s workers.

States are now beginning to take a leading role in this reform movement. In 1997, the Oregon state legislature passed an innovative and daring resolution. It called on the Congress to allow the state to opt out of Social Security and set up its own system based on individual private savings and investment accounts for every worker in the state. Other states are now moving to adopt similar resolutions.

This report will discuss the worldwide revolution in Social Security, and the role of the states in it. After reviewing developments around the world and in the U.S., it will discuss the reasons why Social Security should be reformed to allow workers to choose individual investment and insurance accounts. It will then discuss the role of the states and their actions to date.

The World-Wide Revolution in Social Security

The revolution began with the South American nation of Chile, which adopted a private option for Social Security in 1981. That country was the first in the Western Hemisphere to adopt a Social Security system, doing so in 1924, 11 years before the U.S. Starting in 1981, the government allowed workers the freedom to choose instead to save and invest for their retirement in individual investment accounts similar to IRAs in the U.S. Workers in the private system pay 10% of wages into their individual accounts for retirement benefits. They pay another 3% to finance private life and disability insurance to cover the survivors and disability benefits of the old system.

Over 90% of workers chose the private option. While the payments into the new system are only about half the total payments into the old system, the benefits, fully indexed for inflation, are expected to be at least twice as high. In fact, the targeted replacement rate (the ratio of benefits to preretirement earnings) under the Chilean system is almost twice as high as under the U.S. system. Primarily due to the huge amount of savings contributed to the private system each year, Chile\’s savings rate is over 25%. This has contributed greatly to the country\’s soaring economic growth over the past 15 years. As a result of the private option to Social Security, average Chilean workers already have more savings than average American workers, even though U.S. workers on average earn 7 times as much as average Chilean workers.

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 nations in Latin America have done so, including Argentina, Mexico, Peru, Colombia, Uruguay, Bolivia, and El Salvador.

But the trend has now spread well beyond Latin America. In Great Britain, almost 80% of workers have now opted for a private, individual investment account system in place of the major portion of the government run system there. The remaining public portion is declining over the years relative to wages, and may soon be means-tested or privatized as well.

In 1991, Australia replaced its old public system with a private investment account system as well. Singapore has relied on a fully funded investment system for many years.

Perhaps most remarkably, this trend is also now sweeping the former Communist world. Starting in 1996, workers in the People\’s Republic of China began paying half their retirement funds into an individual investment account system. At the end of 1997, Russia announced that soon all new workers in that country will begin paying into a privatized system, instead of the traditional public Social Security system. Hungary started a private option for its workers this year, as did Kazakhstan, a newly independent state of the old Soviet Union. Poland plans to start its private option at the beginning of next year.

In 1994, the World Bank added to this worldwide trend with its 400 page report,

Averting the Old- Age Crisis(1). The report concludes that the reform in Chile has been a huge success, and advocates a similar private Social Security option for all countries, to address the global crisis in Social Security systems, and to stimulate economic growth.

This worldwide revolution is now taking root in America. At the annual address to the American Economics Association in 1996, Harvard Economics Professor Martin Feldstein, President of the National Bureau of Economic Research, advocated privatization of Social Security in the U.S. Feldstein estimated that the present value of the future economic benefits to the U.S. from such reform would be a truly astounding $10-20 trillion! Such reform has also been endorsed by economics Nobel Prize winners Gary Becker, James Buchanan, and Milton Friedman, as well as American Economics Association President Arnold Harberger. Other top economists are echoing these views.(2)

Think tanks and grassroots groups across the country have also been organizing to support such reform. In 1995, the Cato Institute launched its highly successful national project for the privatization of Social Security. The moderate Democrat Progressive Policy Institute, long associated with President Clinton, has also supported a partial private investment account option. Liberal Democrat Sam Beard, a former staffer for Sen. Robert Kennedy, has promoted the idea in inner cities across the country through his highly effective grassroots group Economic Security 2000. A national grassroots group of young adults, Third Millenium, has also vigorously and effectively supported such reform. Americans for Tax Reform is organizing a national movement of taxpayers in support of the idea.

The U.S. has, in fact, already tried its own small experiment on how privatization would work here. At about the same time that Chile adopted its reforms in 1981, a quiet revolution was going on in south Texas. Three counties near Galveston switched to a private, invested system for their own county government workers in place of Social Security. The law allowed state and local government workers to make such a choice at that time, but further switches were prohibited in 1983.

The system for these county workers operates much like the Chilean system(3). The workers pay into private, individual investment accounts in place of Social Security. The funds are invested in stocks, bonds, and other investments by private investment companies. In retirement, the accumulated funds are used to pay for an annuity guaranteeing workers a specified monthly income for the rest of their lives. The plan also includes private life and disability insurance substituting for the survivors and disability benefits of Social Security. Today, those who retire after 20 years of work under this private, invested option will receive 3 to 4 times the benefits that Social Security would pay after a lifetime of work. The survivors and disability benefits are higher too.

Late in 1996, the Advisory Commission on Social Security, appointed every five years by the President, added further to the developing momentum for reform. The members, appointed by President Clinton, all agreed that some type of new, invested system was necessary. Almost half supported allowing workers an option to choose a private, invested system for almost half of their Social Security taxes, or 5 percentage points out of the total 12.4% tax.

All of this activity is building on a decisive sea change in public opinion. A 1994 national poll by Luntz Research conducted for Third Millenium found that 82% of adults under 35 supported the idea "of directing a portion of their Social Security taxes into a personal retirement account like an IRA which would be kept at any financial institution they would like, and receiving less in Social Security benefits from the government."(4) A 1995 Luntz poll of all adults, conducted for the seniors organization 60 Plus, found the public supporting such an option by 77% to 14%.(5) In 1996, Bill McInturff of Public Opinion Strategies, which conducts polling for hundreds of real world political campaigns each year, found the public supporting the idea by 68% to 11%.(6) More recently, a poll for the Democratic Leadership Council, conducted by Mark Penn, one of President Clinton\’s top pollsters, found 73% of Democrats want to be able to invest at least part of their Social Security taxes in private alternatives.(7)

Finally, several members of Congress have now introduced legislation providing for privatization of Social Security to at least some degree. Reps. John Porter (R-Ill.), Mark Sanford (R-S.C.), and Nick Smith (R-Mich.) each have introduced separate bills providing different plans for a full private Social Security option. Sens. Phil Gramm (R-Tex.) and Rick Santorum (R-PA) have prepared proposals for a private Social Security option as well. Sens. Robert Kerry (D-Neb.) and Daniel Patrick Moynihan (D-NY) have introduced a bill providing for a small option to start, allowing workers to shift 2 percentage points of the Social Security tax to a private, invested system, as have Sens. Judd Gregg (R-NH) and John Breaux (D-La.). Reps. Jim Kolbe (R-AZ) and Charles Stenholm (D-Tex.) have introduced a bill for a 2% private option in the House.

Nationally, in speeches across the country House Speaker Newt Gingrich (R-GA) has been calling for a private investment account option for workers as a major component of the long term Republican agenda. President Clinton has indicated he might support some individual investment account option as part of an overall reform plan. Steve Forbes ran for President in 1996 with a private Social Security option as a major campaign plank, and may well do so again in 2000.

Five fundamental reasons why a private option for Social Security should be adopted

I. Bankruptcy

The most commonly recognized problem for Social Security is that it is inevitably headed for bankruptcy. The government\’s own projections published in the annual report of the Social Security Board of Trustees show that under their intermediate assumptions, the Social Security program will run short of funds to pay promised benefits by 2032, before those under 30 today will be retired. After that point, the financial gulf is huge and growing. Paying all promised benefits to young workers entering the work force today would require raising the Social Security payroll tax to about 18%, compared to 12.4% today, an increase of almost 50%.

Under more pessimistic projections, which are quite reasonable and probably more prudent, Social Security will run short of funds to pay promised benefits in 2022, less than 25 years from now. Paying all promised benefits to those entering the work force today would require almost doubling the current 12.4% payroll tax rate to around 24%.

But even this does not provide the full story of Social Security\’s looming financial crisis. The crisis begins not when the trust funds run out, but when they peak and start to decline. At that point, Social Security will be running deficits each year rather than the surpluses we have seen in the past 15 years or so. As a result, to meet all of its benefit obligations, Social Security will have to start drawing on the program\’s trust funds.

Each year, the Federal government has borrowed any remaining cash in the Social Security trust funds after benefits are paid, and used the money to pay for other government programs — from welfare to national defense. In return for these funds, Social Security receives a newly issued government bond — actually an internal government IOU — promising to return the cash when it is needed to pay promised Social Security benefits.

When Social Security starts running deficits, it will have to start turning in the bonds to the government to obtain the funds to continue to pay promised benefits. The government will then have to do something to obtain the cash to redeem the bonds. It can obtain that cash only by raising taxes, borrowing and running a bigger total budget deficit, or cutting other government spending.

Under intermediate projections, Social Security starts to run a deficit of expenditures over tax revenues in 2013, only 15 years from now. That is when the crisis begins, because that is when the government will have to start coming up with real cash to redeem Social Security trust fund bonds and close the deficit. From then until the trust funds run out in 2032, the government, in fact, will have to raise about $2.3 trillion in today\’s dollars to pay off all the Social Security trust fund bonds. That is a major financial crisis even before the Social Security "trust funds" putatively "run out".

As a result, the Social Security trust funds by themselves do not make the payment of future Social Security benefits any easier, regardless of how high they supposedly grow. The government cannot create new resources to pay future benefits simply by issuing new debt to itself. In truth, the Social Security trust funds are nothing more than a statement of the legal authority Social Security has to draw from general revenues. They are just further claims against Federal taxpayers, and that is why they are part of the problem rather than part of the solution.

These long term financial problems arise most fundamentally because Social Security basically operates on a pay-as-you-go basis. The program does not save and invest the taxes of today\’s workers to pay future benefits, as it would under a fully funded system. Rather, it immediately pays out the taxes of today\’s workers to pay the benefits of today\’s retirees. The future benefits of today\’s workers are to be paid out of the future taxes of future workers. The Social Security trust funds hold only a small fraction (less than 10%) of the amount that would be accumulated under a fully funded system. Moreover, as discussed above, what the Social Security trust funds do hold are not real assets that can help to pay future benefits, but only internal government IOUs.

This pay-as-you-go method of operation leaves the system vulnerable to a wide range of adverse demographic and economic developments that can upset the delicate balance between taxes and benefits. The rapid increase in fertility right after World War II producing the huge Baby Boom generation will create enormous benefit demands on the system when this generation retires. At the same time, the sharply declining fertility starting in the early 1960s will create a downturn in tax revenues paid by workers just when the baby boom is in retirement drawing benefits. Markedly increased life expectancy and slower wage growth are also creating severe long term problems for Social Security\’s pay-as-you-go system.

II. Bad Deal for Today\’s Workers

Social Security suffers from an even bigger problem than its impending bankruptcy, however. The program is now a bad deal for today\’s workers. Payroll taxes are already so high that even if these workers receive all currently promised benefits, they will be getting a low, below market return on the taxes they and their employers will pay into the system throughout their careers. These workers would get much higher returns and benefits investing the same funds in the private sector.

This problem arises again because of Social Security\’s pay-as-you-go system, where the taxes paid in today are mostly immediately paid out to finance current benefits, without any real savings. In a private, fully funded system, the money paid in is saved and invested in new capital investments. These capital investments actually increase production, and the value of this production increase is returned to investors in the form of a rate of return or interest payment on their investments. Over the course of a lifetime, this return would accumulate to large sums, which would then be used to finance benefits in retirement.

But a pay-as-you-go system like Social Security adds nothing to production. It just transfers funds from one segment of the population to another. This means that workers under such a system lose the full amount of the increased production and associated returns they would get if their money was invested in private, productive assets through a fully funded system. The payroll tax financed redistribution system can pay some effective return as revenues grow over time due to increased wages and population growth, enabling the system to pay more to retirees than just what they paid in. But this effective return, which is still obtained by a tax transfer from others rather than increased production, will never be anywhere near as great as the full returns produced by capital investment.

The most comprehensive study documenting the difference between these two systems was published by the National Chamber Foundation in 1986.(8) The study examined workers entering the workforce in 1985 with a wide range of different family and income combinations. The study first calculated the real rate of return, after inflation, that these workers would receive in Social Security benefits on the taxes they and their employees would pay into the system throughout their careers. These calculations covered the full range of Social Security benefits, including the actuarial value of the program\’s survivors and disability benefits.

For average income two earner couples, the real returns are less than 1%. For those with above average incomes, the real returns are close to zero or even negative. The same is true for single workers. Even for lifetime one earner couples, which receive substantial additional benefits for the non-working spouse without paying more in taxes, the real return is about 2% or less. For most of today\’s young workers, who will be single or in two earner couples, the real returns paid by Social Security will be around 1% or less.

We can compare these returns to investment returns in the private sector. Over the 70 year period from 1926 to 1996, the composite real rate of return on all stocks on the Standard and Poor\’s 500 was 7.5%.(9) The composite real rate of return on smaller company stocks on the New York Stock Exchange over this period was even higher, at 9.5%.(10) A diversified portfolio of 75% large stocks and 25% small stocks would have earned a real return of 8%. For corporate bonds, the average real return going back to 1919 is about 3%. If we exclude the period of government interest rate controls from 1941 to 1951, the real return is 4%.(11)

The study went on to calculate the benefits workers would get if they were allowed to save and invest in the private market the payroll taxes they and their employees would otherwise pay into Social Security. Part of the funds were used each year to buy private insurance covering the same disability and pre-retirement survivors benefits as Social Security. The study results were updated for a new book published by the Cato Institute this year.(12)

The amount of accumulated assets at retirement in the IRA vehicle for each family is shown in the first row of data in each table. The second row, labeled "Perpetual Annuity", shows the amount of benefits that could be paid out of the continuing returns on the assets alone, leaving the assets themselves intact to pass on to children or other heirs. The next two rows, labeled "Life Annuity", indicate the amount of benefits that could be paid if the accumulated assets were to be entirely consumed over the retirement period, leaving nothing for heirs. These annuity benefit values were adjusted to pay the same ratio between benefits with both spouses alive and with one spouse alive as Social Security. The next two rows in each table indicate the amount of Social Security benefits that would be paid to each family.

Perhaps the best example to focus on is the couple with two average full-time workers, where the husband earns the average income for full time male workers, and the wife earns the average income for full time female workers. At a 6% real return, they would retire with a trust fund of about $1.6 million ($1,628, 297) in today\’s 1998 dollars. This fund would pay them about three times as much as Social Security, while still allowing them to leave the $1.6 million to their children. Or they could use the fund to buy an annuity that would pay them about 7 times what Social Security would pay. Moreover, even at a 4% real return, they would retire with almost $1 million ($944,628) (Table 3). This fund would still pay them more than Social Security out of the continuing returns alone, 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 3 times (3.27) what Social Security would pay.

For another example, let\’s examine the family where the husband works and earns the average income of a male head of household each year, and the wife works at home caring for the children. At the 6% real return, this family would retire with a trust fund of just over $1 million ($1,059,505) in today\’s 1998 dollars. That fund would pay them over twice what Social Security would out of the continuing returns alone, while still allowing them to leave the $1 million trust fund to their children. Or they could use the fund to buy an annuity that would pay them almost 5 times (4.77) what Social Security would pay. Moreover, at a 4% real return, the couple would retire with a trust fund of $613,657, which would finance an annuity paying the same as Social Security, while leaving $341,000 to the children. Or the couple could use the fund to buy an annuity paying well over twice (2.25 times) what Social Security would pay.

The same is true for all other workers. Everyone would get much higher benefits through the private system – low income workers, high income workers, married couples, single people, one earner couples, two earner couples, families with children, families without children, blacks, whites, hispanics, and, indeed, all minority groups.

These first two problems alone show why privatization is the only solution to Social Security\’s problems. If taxes are raised or benefits cut to solve the bankruptcy problem, then Social Security will become an even worse deal for today\’s workers. Or if taxes are cut or benefits raised to make Social Security a better deal for today\’s workers, then the system\’s financial crisis will worsen. The only way to solve both these problems is through a private savings and investment alternative. The long term financing problems of Social Security would then be averted, while the high returns and new income generated by the private investments will in fact fully finance even better benefits than Social Security.

III. Economic Growth

A third reason for such reform is that it would substantially increase economic growth and general prosperity. Social Security displaces private, fully funded alternatives, where the funds coming in would be saved and invested for the future benefits of today\’s workers. But since Social Security operates on a pay-as-you-go basis, with the funds coming in mostly paid out immediately to current beneficiaries, it produces no savings to offset the loss of the savings from the displaced private alternatives. The result is a large net loss of national savings. Reduced national savings mean in turn reduced capital investment, lower wages, less national income, and slower economic growth.

Feldstein recently suggested based on his review of the econometric studies on this issue that Social Security reduces private savings by at least 20-25 percent, and possibly as much as 40-60%, as his own econometric studies show. Such a massive loss of savings would produce a loss of GDP equal to 5-10%.(13)

The hefty payroll tax discourages work and employment, further reducing national income and economic growth. Feldstein estimates this effect as reducing GDP at least 1%.(14) Consequently, Social Security quite possibly reduces GDP by 6% to 11%.

Shifting to a private, fully funded system would reverse these negative economic effects. With hundreds of billions saved and invested through the private system each year, national savings would likely increase substantially, producing higher investment, greater productivity, higher wages, more jobs, and more rapid economic growth. Replacing the payroll tax with reduced mandatory private retirement savings that the worker will enjoy in retirement with full market investment returns will also eliminate most of the negative economic effects of the payroll tax. That is why Feldstein estimates that the present value of the future economic benefits from privatizing Social Security is on the order of $10-$20 trillion.

IV. Social Equity

Low income workers would be among the biggest winners from a private system. Even though the Social Security benefit structure is skewed to provide relatively higher returns to low income workers, the higher returns of the private system overwhelm these redistributive subsidies within Social Security. As a result, a private, invested system would pay low income workers at least 2 to 3 times the benefits promised by Social Security.

For example, take the case of a low income couple where both work and earn the equivalent of the minimum wage each year for their entire careers. Suppose they could save and invest through the private sector what they and their employers would otherwise have to pay into Social Security. At a 6% real return, this low income couple would retiree with a trust fund of almost $700,000 ($693,395) in today\’s 1998 dollars (Table 2). That fund would pay them more than twice (2.26) times what Social Security would pay out of the continuing returns alone, again allowing this low income couple to leave almost $700,000 to their children. Or they could use the money to buy an annuity that would pay them about 5 and a half times (5.46) what Social Security would pay.

Even at a 4% real return, the couple would retire with a fund of $375,400 (Table 3). The couple could use the fund to buy an annuity that would pay them about 2.5 times (2.44) what Social Security would. Or the couple could use part of the fund to buy an annuity matching what Social Security would pay, while leaving $220,000 to their children.

Moreover, these calculations do not even account for the fact that blacks and other minorities, and the poor in general, have below average life expectancies. As a result, they tend to live fewer years in retirement and collect less in Social Security benefits. In a private, invested system, by contrast, they would each retain control over the funds paid in, and could arrange to receive higher benefits over their fewer retirement years, or leave more to their children or other heirs.

The higher returns and benefits in a private, invested system would be most important to low-income families, as they most need the extra funds. The saved funds in the individual retirement accounts which could be left to the children of low income families would also greatly help poor communities break out of the cycle of poverty. Similarly, the improved economic growth, higher wages, and increased jobs that would result from privatization would also be most important to the poor. Moreover, without reform, low income workers would be hurt the most by the higher taxes or reduced benefits that will be necessary under the current Social Security system. Avoiding this financial crisis would, therefore, again be most important to low income workers.

In addition, with a privatized Social Security system, the distribution of wealth throughout society would become far more equal than today, as average and low income workers who have little or nothing in savings today accumulate huge sums in their own investment accounts. Moreover, privatizing Social Security would turn every worker into a stockholder or investor in American business and industry. As a result, support for free market, pro-growth policies improving the prospects for these free enterprise would increase greatly throughout society.

V. Freedom of Choice and Control

Finally, a private option for Social Security would greatly increase freedom of choice and control of workers over their own incomes. They would be free to choose whether to stay in Social Security or switch to a private invested system. They could determine the course of investment of their funds, primarily through choice of investment intermediaries. Because they would be financing their own benefits with their own accumulated funds, they can have greater freedom of choice over their own retirement age.

They could also tailor their retirement benefits to suit their personal needs and preferences. They could devote more to their retirement benefits and less to survivors and if their family circumstances warranted it. They could retain some or all of their accumulated funds to leave to their children. They could take more out when special needs or opportunities arose, such as essential medical bills, or college education for the grandchildren, or a down payment loan for a new home for a son or daughter\’s new family.

Ultimately, this freedom of choice and control may be most important of all to people.

The Role of the States

Early in 1997, the state of Oregon surprised the nation by boldly asserting a leadership role in the Social Security reform movement. The state legislature there passed a resolution calling on Congress to enact legislation to allow the state to opt out of Social Security and adopt its own alternative system for workers in that state.

The resolution is based on a precedent taken from Federal welfare programs. In several of these programs, states can ask the Federal government for a waiver to adopt their own welfare experiments and programs. Highly successful innovations in welfare policy have resulted from this waiver process. The Oregon resolution basically asked Congress to adopt a similar waiver system for Social Security, so states can start adopting their own Social Security reforms now.

How might such an alternative state system work? Workers can be allowed the freedom to choose to provide for their retirement, survivors, and disability benefits through a private, individual account, like an IRA, rather than Social Security.

Since private investment returns are so much higher than Social Security, those who choose the private option do not need to pay as much into the individual investment accounts as required by Social Security. If a worker chooses the private option, the employer and worker can each pay 5% of wages into the individual account, instead of the 6.2% that each must pay into Social Security. This would provide an effective 20% payroll tax cut for those who choose the private option.

Part of the funds paid into the individual investment accounts would have to be used to purchase private life and disability insurance covering at least the same pre-retirement survivors and disability benefits as Social Security. Workers would consequently be covered for these contingencies through the private system as through Social Security.

The remaining funds contributed to the workers\’ accounts would then be invested over the years with returns accumulating tax free. Ideally, this investment would be conducted through a system of private, professional, investment management firms. Firms from across the country would apply to the state government to be designated as recognized investment managers eligible to handle investment of the private retirement accounts. Workers would then choose among these designated firms to handle the funds in their individual accounts.

This system would make investment of the private retirement accounts easy for unsophisticated investors. Workers only need to choose an investment management firm. The firm would then choose the investments. These firms would be well-established banks, brokerage firms, insurance companies, mutual funds and other financial institutions. In the well-developed and highly sophisticated financial system in the U.S., workers would have many options to choose from across the country. This system would also protect workers from fraudulent operators, as only established firms that receive government designation could accept private retirement account funds for investment. This system has worked well even for unsophisticated, rural, Chilean workers. Over time, options for some self-direction of the investment of the funds where appropriate could be developed.

The same regulatory restrictions would apply to investments for the private retirement accounts as apply to IRAs today. This would allow broad scope for choosing investments to earn the highest reliable returns. But highly risky and speculative investments would be excluded. Workers could not withdraw funds from the accounts before retirement.

Benefits at retirement would equal what the accumulated funds in each worker\’s individual account would support. The worker could use the funds to purchase an annuity paying promised benefits for the rest of the worker\’s life. Or the worker could make regular, periodic withdrawals and conserve the funds to leave to children or other heirs. Regulations would limit such withdrawals so the retiree couldn\’t use up all the funds early and then be left without retirement support.

Workers in the private system could retire at any age after 59 and a half. They could even retire earlier if their accumulated funds were sufficient to finance a specified standard of benefits throughout retirement years.

There would be no government guarantee of the investment funds in the private retirement accounts. But the state government would guarantee all workers a minimum benefit. If the private retirement benefits for a worker were not at least as high as this minimum benefit, the state would pay the difference to bring the worker up to the minimum level. This would guarantee that no one\’s retirement income would fall below a basic level. Indeed, this minimum benefit could be set equal to the average benefit under Social Security. With the likely performance of the private investment system in providing much better benefits than Social Security, as described above, government expenditures for such a minimum benefit are likely to be quite small. Yet, lower income workers would actually be guaranteed more than Social Security promises today.

Workers choosing the private option would receive recognition bonds from the Federal government compensating them for past taxes paid into Social Security. At retirement, these bonds would pay a proportion of Social Security benefits equal to the proportion of lifetime Social Security taxes the worker and his or her employer had paid.

There would be no change in Social Security for today\’s retirees. They would continue to receive their promised benefits in full. The Federal government would finance these benefits, as well as the recognition bond payments. The Federal government could use the wide range of resources to finance these obligations described in detail in studies published by the Cato Institute.(15)

Workers would be perfectly free to choose to stay in the continuing public Social Security system if they prefer. The private individual account system would be an option for workers to choose.

Yet, if workers across the country were free to make this choice, virtually all would likely do so, as in Chile and elsewhere. The long term financing gaps of Social Security would then be eliminated, as workers would then be relying ontheir private investment accounts for their benefits. This would be accomplished, moreover, without benefit cuts or tax increases. Indeed, workers and employers would enjoy a substantial effective payroll tax cut, while workers would receive far higher returns and benefits through the private market investments. The huge amount of savings contributed to the private accounts would also greatly boost the entire economy, producing higher wages and more jobs. Low income workers would again benefit the most, as described above. They could expect at least 2 to 3 times the benefits promised them by Social Security. Workers overall would also enjoy much greater freedom of choice and control over their own retirement funds.


States should join Oregon in calling on Congress to give them the freedom to adopt their own private, alternative systems to Social Security for their citizens. For no other reform could do so much to increase the liberty and prosperity of the American people.



1. World Bank Policy Research Report, Averting the Old-Age Crisis: Policies to Protect the Old and Promote Growth, (New York:Oxford University Press, 1994)

3. William Even and David McPherson, Freed from FICA: How Seven States and Localities Exempt a Million Employees from Social Security and Provide Higher Pension Benefits to Retirees (New York:Third Millenium, 1997)

4. Luntz and Siegel, supra

5. The poll of 703 adults was conducted nationwide by Luntz Research, Rosslyn, VA on Aug. 3-4, 1995, for the national seniors organization 60Plus.

6. See Michael Turner, Public Opinion and Social Security Prizatization, Cato Institute, Social Security Paper no. 5, August 6, 1996

7. Mark Penn, Rebuilding the Vital Center, 1996 Post-Election Voter Survey, Penn and Schoen Associates, Inc., 1997

8. Ferrara, Social Security Rates of Return for Today\’s Young Workers, supra

9. Stocks, Bonds, Bills, and Inflation, 1997 Yearbook, (Chicago, Ill: Ibbotson Associates, Inc. 1986).

10. Ibid

11. Calculated from Moody\’s Investor Services, Industrial Manual, Bond Survey

12. Ferrara and Tanner, A New Deal for Social Security, Chapt. 4

13. Feldstein, The Missing Piece in Policy Analysis, pp. 6-8

14. Id., p. 12

15. Peter J. Ferrara, A Plan for Privatizing Social Security, Cato Institute, Wash. DC, SSP No. , Peter Ferrara and Michael Tanner, A New Deal for Social Security (Wash, DC: 1998), Chapter 9.