News Release

October 9, 2001

Critics of personal savings accounts wrong, study says
Objections to privatizing Social Security are flawed, based on misconceptions

WASHINGTON—Despite the fact that President Bush's Social Security commission has yet to offer specific proposals for personal savings accounts, many opponents have already begun to criticize such an idea—especially in the wake of the 9/11 attacks and the subsequent market downturn. But in the new Cato Institute study, "The Failed Critique of Personal Accounts," Social Security expert Peter Ferrara explains that the critics are wrong and that most objections "generally reflect fundamental misconceptions of and confusion about Social Security's current problems."

In his study, Ferrara identifies the leading criticisms and shows how each is flawed. One popular claim is that there is no Social Security crisis because once the system begins to run a deficit in 2016, government bonds in the Social Security Trust Fund will be used to pay out benefits. But Ferrara explains that bonds in a trust fund are not cash in a bank. Benefits will have to be paid out of general revenues—something that can't be done without a massive tax hike or doubling the federal debt, he says.

"The problem has never been that the government couldn't be counted on to pay off the government bonds in the trust fund," Ferrara writes. "Rather, the problem is that it is going to be economically quite painful to pay them off."

Another common critique is that under a privatized system workers would give up a guaranteed benefit for uncertain and risky returns. But the fact is that Social Security benefits are not guaranteed, Ferrara says.

"The Supreme Court has ruled … that Social Security benefits are not backed by a government guarantee and that Congress is free to reduce them or even cut them off for any or all workers at any time," Ferrara writes.

Meanwhile, markets have consistently paid out returns higher than any one could expect from Social Security, Ferrara says, even during periods that include slumps such as the one following the 9/11 terrorist attacks. He also explains that all proposed plans to create personal accounts include a government guaranteed minimum benefit that all workers will receive at the very least.

"The Failed Critique of Personal Accounts"