Commentary

Worldwide Social Security Revolution

By Peter J. Ferrara
January 21, 1998

Last month, Russian Deputy Prime Minister Boris Nemtsov told the press that up until now Russians have only known Chilean wines and juices. The context was adoption of a new law that would soon familiarize Russians with another major Chilean export, private Social Security.

Under that law, new workers will pay into a private system of savings and investment accounts instead of traditional Social Security, much as Chilean workers were allowed to do almost 20 years ago. While Russia is still a chaotic country where effective implementation of such reform remains uncertain, the bold move by the former citadel of communism dramatizes an accelerating policy revolution in Social Security that is sweeping the planet.

Supposedly communist China has indeed already adopted such reform. Workers there now pay half their retirement payments into an individual investment account system, and half into a traditional Social Security system. This trend is in fact poised to sweep the entire former communist world. Hungary started its private system at the beginning of this year, and Poland plans to do so next year. Lithuania, Bulgaria, Romania, Kazahkstan, and others may soon follow.

The revolution has spread to these lands from Latin America, where it began with Chile’s famously successful privatization plan adopted in 1981. Similar plans have now been adopted in Argentina, Peru, Colombia, Mexico, Bolivia and El Salvador. Private Social Security systems have also been adopted in Great Britain and Australia.

Last month, representatives from 38 countries met in London at a conference sponsored by the Cato Institute and the Economist to discuss Security privatization in their countries. Nobel prize winner Gary Becker and economists from the World Bank gave their support to the effort. This worldwide revolution is now beginning to take hold among America’s political leaders. In his Jan. 6 speech laying out his view of the long-term reform agenda for the United States, House Speaker Newt Gingrich called on every member of Congress to help build a nationwide grassroots network to discuss and support fundamental Social Security reform. The goal, Mr. Gingrich said, would be to build “the best and safest retirement system possible.” He then indicated what kind of system he thought that would be, saying, “Anyone who tells you we only have painful choices about Social Security doesn’t understand the marketplace. We shouldn’t have painful choices. We ought to have better choices with better returns and with greater opportunities. The power of compound interest means that the young people of today ought to have a better return on their investment and a higher value added. They ought to be able to retire with more money, not less. And anybody who says that can’t happen should be introduced to the market. The fact is that we can do this.”


If Mr. Clinton wants to leave a major legacy, this is his issue. Reform would not only avert the system’s financial crisis, it would also allow workers to earn much higher returns and benefits available through a private system.

Mr. Gingrich well knows that the only way to do this is to allow today’s young workers the freedom to choose to save and invest through their own individual accounts in the private sector in place of Social Security. Only through such an option can workers have “better choices with better returns” and “with the power of compound interest” actually “retire with more money not less.”

What Mr. Gingrich is clearly trying to do, carefully given the responsibilities of his leadership position, is to begin to move Congress down the road to such reform. House Budget Committee Chairman John Kasich, Ohio Republican, similarly told “Meet The Press” recently, “The answer to Social Security is to basically set people free and allow them to make their own decisions to allow the younger people in this country to be able to make their own investments. I mean, we can set out the parameters as to what legitimate investments are. But we need to allow people to have more control over their retirement money so, in fact, we can get ourselves out of this mess. House Majority Leader Dick Armey, Texas Republican, has also stated support for such reform in the past.

Now even President Clinton appears to want to get into the act. He will reportedly acknowledge Social Security’s problems in his State of the Union address, and perhaps call a special session of Congress to deal with the issue in December. Moreover, Mr. Clinton has long been rumored to personally favor some form of private option.

If Mr. Clinton wants to leave a true and major legacy, this is his issue. Such reform would not only avert the system’s financial crisis, which would otherwise eventually require payroll tax increases of 50 percent to 100 percent. It would also allow today’s workers to earn the much higher returns and benefits now available through the private system. Average income families saving and investing through their own accounts during working years, instead of Social Security, and earning just over half the average return in the stock market over the last 70 years, would reach retirement with more than $1 million in today’s dollars. This fund would pay them three times or more what Social Security promises.

Such reform would also greatly benefit low income workers, who could not afford the alternatives of higher taxes or reduced benefits. Through the private system, they could expect more than twice what Social Security promises.

The president would not be without allies in his own party. Sen. Bob Kerrey, Nebraska Democrat, has long proposed a small private option, and seems poised to support more. Rep. Charles Stenholm, Texas Democrat, has co-chaired a longstanding bipartisan House caucus studying the issue. The Progressive Policy Institute, affiliated with the Democratic Leadership Council Mr. Clinton has long championed, has supported such reform for years. And a recent nationwide poll by Democrat pollster Mark Penn found that 73 percent of Democrats want the freedom to invest at least part of their Social Security taxes in private alternatives.

The president, in fact, could cut a deal with the Republican leadership now to allow an option starting next year for half the system. Washington seems capable of dealing with that now, under top bipartisan agreement.

Remember, Mr. President, there is a tide in the affairs of men which, taken at the flood, carries on to great fortune; omitted, and all of life is spent in shallows and miseries.

Peter Ferrara is general counsel and chief economist at Americans for Tax Reform and co-author with Mike Tanner of “A New Deal for Social Security,” forthcoming from the Cato Institute.