Social Security Choice Paper No. 24

No Second Best: The Unappetizing Alternatives to Social Security Privatization

Executive Summary

Although proposals for privatizing Social Security have been much debated, there has been far less discussion of the alternatives. Indeed, most opponents of privatization would prefer to avoid comparing various proposals for reform. That is probably because their alternatives boil down to some very unpopular options — raising taxes, cutting benefits, or government investment in the stock market.

Not surprisingly, the alternative most frequently suggested by opponents of privatization is to increase taxes, either directly or indirectly. Suggested tax changes range from increases in payroll tax rates or the base income on which payroll taxes are collected to the use of general revenues and, particularly, repeal of the income tax cuts that passed Congress in 2001. Other tax changes proposed include increasing capital gains taxes, taxing all stock transactions, increasing taxes on Social Security benefits, and requiring newly hired state and municipal workers to participate in Social Security.

Opponents of privatization are also willing to consider significant cuts in Social Security benefits. Many would increase the computation period used to calculate benefits — a proposal that would be particularly harmful to women and minorities — and raise the retirement age, which would particularly affect lower-income and minority workers, who have shorter life expectancies. Others would reduce spousal benefits or trim increases in cost-of-living allowances.

Finally, many opponents of individual accounts would allow the federal government to directly invest Social Security funds in private capital markets. That approach risks politicizing the investment process and undermining our free-market economic system.

Allowing workers to privately invest Social Security taxes makes sense on its own. It gives workers ownership of and control over their money, increases rates of return, allows low-income workers to accumulate wealth, and moves the system toward fiscal balance. Compared with the alternatives, privatization looks even better.

Read the Full Social Security Choice Paper

Michael Tanner is director of the Cato Institute’s Project on Social Security Privatization and coauthor of A New Deal for Social Security (1998).