SSP No. 9 May 29, 1997

Social Security

Social Security Privatization: One Proposal

by David Altig and Jagadeesh Gokhale

David Altig is vice president and economist and Jagadeesh Gokhale is an economic adviser at the Federal Reserve Bank of Cleveland. The views contained herein do not necessarily represent those of the Federal Reserve Bank of Cleveland or the Federal Reserve System.

Executive Summary

As Social Security's problems become more apparent, there is growing support for privatizing the retirement program. As the debate intensifies, it becomes more important to move beyond generalizations and provide detailed proposals for accomplishing privatization. Without endorsing any specific proposal, the Cato Project on Social Security Privatization will present a number of possible privatization scenarios.

In this study, David Altig and Jagadeesh Gokhale offer a proposal based on the following key elements:

The authors make the important point that the window of opportunity for such a privatized system is narrow. For example, if the system were implemented immediately, workers under the age of 32 could shift to the privatized system, diverting 46 percent of their payroll taxes to individual accounts. However, if privatization were delayed until 2011, only individuals under the age of 20 could move to the new system, and those individuals could divert only 22.1 percent of their payroll taxes. Therefore, moving to a privatized Social Security system takes on a new urgency.

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