SSP No. 10 July 22, 1997

Social Security

Common Objections to a Market-Based Social Security System: A Response

by Melissa Hieger and William Shipman

Melissa Hieger is a vice president and William Shipman is a principal with State Street Global Advisors. Mr. Shipman is co-author of: Promises to Keep: Saving Social Security's Dream and co-chairman of the Cato Project on Social Security Privatization.

Executive Summary

The debate over whether Social Security needs to be reformed is largely over. The question now is what type of reform. Many experts suggest moving toward a saving and investment structure wherein some portion of the Social Security tax is invested in markets.

Opponents of privatizing Social Security, however, warn of numerous and formidable risks associated with markets. Among other issues, they raise questions of market risk, retirement benefits of low-income workers in a privatized structure, potential difficulties for unsophisticated investors in a market-based system, and the plight of survivors of deceased workers.

None of these objections survives a careful examination of the evidence. In fact, most represent a misunderstanding of financial markets and Social Security and how a privatized Social Security system would work. For example:

Full text of SSP No. 10 (PDF, 28 pp, 316 Kb)