Commentary

Tinkering Won’t Save Social Security: The Only Sensible Solution is to allow Private Investment

From President Clinton on down, there is now a national consensus that Social Security is in trouble. Indeed, the retirement program will begin running a deficit by 2012, just 14 years from now. The program’s total unfunded liabilities top $9 trillion.

Yet in the face of the coming crisis, some still resist serious change. They still suggest that a little tinkering around the edges will be enough to fix Socia1 Security.

Some want to raise taxes. But payroll taxes have already been raised more than 38 times since Social Security began. Even after accounting for inflation, payroll taxes are 800%

higher than at the program’s inception. Three out of four American workers now pay more in payroll taxes than they pay in federal income taxes.


What we really need is a new Social Security system based on the power of private investment and individual savings.


Others want to cut benefits. But young workers are already going to receive less back in benefits than they pay in Social Security taxes. Reducing benefits will only make Social Security a worse deal for these young workers.

Tinkering will not fix Social Security’s most basic flaw. Social Security is a pay-as-you-go program, similar to the type of pyramid scheme that is illegal in every state.

Taxes paid by today’s workers are not saved for their retirement, but rather are spent immediately to pay benefits for today’s retirees. When those workers retire, they have to hope that the next generation of workers will be large enough to support them. But with people living longer and having fewer children, the number of workers supporting each retiree is shrinking.

What we really need is a new Social Security system based on the power of private investment and individual savings.

Under such a plan, benefits to current retirees would be guaranteed, but workers would be given the option of shifting their payroll taxes to individually owned retirement accounts, similar to 401(k) plans.

Those accounts would be privately invested in real assets such as stocks, bonds, annuities, etc. Because private investment brings much higher returns, individuals could expect to receive much higher retirement benefits.

It’s time to stop tinkering and get on with the fundamental reform necessary to preserve retirement security for future generations.

Michael Tanner is director of health and welfare studies at the Cato Institute.