Commentary

Retiring with Dignity

In his Sept. 22 op-ed article in the Wall Street Journal, Democratic National Committee chairman Howard Dean vowed his party would “ensure that a retirement with dignity is the right and expectation of every single American,” and prevent “the privatization of Social Security.”

Mr. Dean didn’t tell us what he means by “privatization of Social Security” or “retirement with dignity,” but he seems to conclude that the former would jeopardize the latter. Is he onto something?

In testimony before the House Ways and Means Social Security Subcommittee 12 years ago, I explained some of Social Security’s weaknesses, and expressed support for the same ends Mr. Dean seeks:

I offer this testimony in the spirit of the starting point for an alternative: a concept of privatization wherein Americans benefit from the engine of a free economy and free choice. With privatization properly structured, today’s elderly will be protected, the young will retire with higher income, and our political leaders will have offered, once and for all, a lasting solution for which all voters will be thankful.

The following year, in a paper titled “Retiring with Dignity: Social Security vs. Private Markets,” I wrote that “retiring with financial dignity is in jeopardy.”

“Compassionate in intent, but flawed in design,” I argued, “Social Security will prevent many from enjoying financial security in their later years.”

In fairness, Mr. Dean may simply not know what privatization means. In that, he is not alone.

Privatization, although complex in detail, is based on four simple principles. The first is the freedom to choose one’s own retirement package. Today, workers are required to pay Social Security taxes, employer and employee combined, equal to 12.4 percent of their wages up to $94,200; they have no choice. Privatization would offer a choice — to stay with Social Security or participate in an alternative retirement plan. No one would be forced to leave Social Security, but everyone would be allowed to.

The second principle is the opportunity to save. Many workers have little ability to save after paying their payroll and income taxes, plus food, shelter and clothing expenses. Privatization would give them this opportunity, because part of the 12.4 percent tax could be saved and invested in personal retirement accounts.

The third principle is the chance to accumulate real wealth. The part of the payroll tax that was saved would be invested in portfolios of wealth-producing assets. The portfolios would be regulated and broadly diversified across asset classes such as stocks and bonds.

Given the history of global capital markets, the savings during one’s working years would accumulate to hundreds of thousands of dollars in retirement. This is an opportunity many people simply never have had. This wealth would be people’s personal property, much like their 401(k) plans or individual retirement accounts, and the government could not take it away. In contrast, and unbeknownst to many, retirees have no legal right to Social Security benefits.

The fourth principle is the freedom to give. Under today’s law you are not able to bequeath Social Security benefits after your death, for that is when they end. With privatization, once you had purchased an annuity that ensured a stipulated level of retirement income, you could pass on the remaining assets to whomever you wished — your children, your church, anyone — whenever you wish. You wouldn’t have to do that, but you could.

Beyond these freedoms and opportunities, privatization offers greater dignity in retirement — in part because it would provide greater benefits for each dollar saved than Social Security does for each dollar taxed. Greater retirement income at a lower cost allows people more options, more opportunities, more choices and more dignity during both their retirement and working years.

These benefits would not come without risk, but neither do Social Security’s benefits. Privatization would force people to face market risks while Social Security forces them to face political ones. But under all reasonable assumptions, a well-designed saving and investment system, with personal property rights, incurs less risk than the government’s tax-based system. As I wrote in “Retiring with Dignity”:

What the public has been encouraged to think is a secure, funded, government pension program that offers retirees reasonable benefits in return for taxes on their labor is, in fact, something else. It is a coercive, intergenerational transfer tax system that relies on unrealistic assumptions and pays unreasonably low benefits.

All of us, our children and their children too, should have the ability to retire with financial security and dignity. Privatization, properly structured, will not only provide that, but additional freedoms and opportunities as well.

Privatizing Social Security would give people the freedom to choose how to finance their retirements, the opportunity to save, the chance to accumulate wealth and the freedom to give it to the people and causes they love. Does Howard Dean really want to prevent that?

William G. Shipman is chairman of CarriageOaks Partners, LLC, and co-chairman of the Cato Institute’s Project on Social Security Choice.