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Social Security pays to this couple falls by one

have raised a number of concerns that must be

Even if the

third: say from $1,500 to $1,000 per month.

addressed before privatization can become a

stock market

This category of survivors, aged widows and

reality. However, a careful examination of these

were to fall as

widowers, makes up approximately 85 percent

objections shows that they are not justified.

of all survivors as well as their benefits.33 They

Contrary to the critics' claims:

dramatically

are not disadvantaged by a privatized system; in

as its worst

1. Low-income workers will benefit from pri-

fact, they may be disadvantaged by Social

vatization.

day, month, or

Security. For in the former there is no necessary

2. Ordinary Americans are perfectly capable

reduction in benefits as a consequence of death

quarter in

of making the kind of investment decisions

as there is in the latter. For these survivors--

history, the

required under a well-structured market-

again, about 85 percent of the total--a market-

based system.

market-based

based system offers greater retirement wealth

3. While both a market-based retirement sys-

than does Social Security.

system

tem and Social Security entail different

The remaining 15 percent of survivors are

provides

types of risk, the former is actually less

largely disabled widows and widowers, chil-

risky than the government system and

workers of all

dren, and widowed mothers and fathers caring

should provide higher returns over the long

for child beneficiaries. Collectively, their annual

income levels

run.

benefits amount to about $13.7 billion, only 4.6

greater

4. Given the estimated returns from a market-

percent of fiscal 1996 total OASI benefit pay-

based system, a short-term market crash

retirement

ments of $300 billion.34 Children's benefits

equal to the worst in history would not wipe

comprise $11.1 billion of the $13.7 billion.35

benefits than

out an individual's retirement savings.

In some cases, the market-based structure

Social

5. The volume of new investment could easi-

would not be able to meet the financial burden

ly be absorbed by financial markets without

Security.

resulting from an early death. Should this hap-

creating a speculative bubble.

pen, remaining benefits could be financed

6. A market-based system would appeal to

through general revenues. It is important that no

individuals across all income, age, and edu-

child left without a working parent because of

cation levels.

tragedy be left without benefits. In other cases,

7. Administrative costs would not be exces-

such as when death occurs close to retirement--

sive.

allowing for a significant accumulation of

8. A market-based retirement system could

wealth--or when the survivors' ages are near the

provide survivors benefits equal to, if not

last year of eligibility (generally, eighteen years

greater than, the current Social Security

old), the amassed assets could finance most, if

system.

not all, of  Social Security's equivalent sur-

vivors' benefits. The combined impact of these

The privatization of Social Security is an idea

possibilities is that total government financing

whose time has come. While many issues of

would be less than $13.7 billion. Beyond this,

such a system's design, particularly transition

term life insurance can be purchased for individ-

measures, remain to be worked out, the most

uals in their twenties for about $200 for

common criticisms of a market-based retirement

$100,000 coverage. This is inexpensive protec-

system are unfounded and should not stand in

tion during the time one is just starting out.

the way of providing a better and more secure

Coverage can be reduced as assets are built.

retirement program for today's workers.

Conclusion

Notes

The U.S. Social Security system is the largest

The authors are grateful to Karl Borden, Peter

government program in the world. For the most

Ferrara, Charlie Kenney, Larry Kotlikoff, Olivia

part it is highly regarded, and it touches the lives

Mitchell, Paul Schofield, and in particular Mike

of millions of people. But it is no longer finan-

Tanner for his detailed comments and sugges-

cially viable. A growing number of experts rec-

tions. We would also like to give special thanks

ognize that the only way to solve Social

to Bruce Schobel, whose contributions and

Security's problems is through harnessing the

extraordinary efforts greatly enhanced the qual-

power of private capital markets.

ity of this work. As always, he was untiring in

As the debate over Social Security reform has

offering his time and wisdom. We take responsi-

moved to the mainstream, critics of privatization

bility for all errors.

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