Social Security Privatization: Bad for the Disabled?

March 14, 2001 • Commentary
This essay originally appeared on Nation​al​re​view​.com. Copyright 2001 National Review.

Critics of Social Security privatization will say almost anything to make sure this good idea never becomes law. Their latest claim is that letting workers invest part of their Social Security taxes in personal retirement accounts would thrust disabled Americans into poverty. Don’t believe it.

Social Security is more than a retirement program. It also provides monthly payments to workers who become permanently disabled. So it was eye‐​opening when the federal government’s investigative arm, the General Accounting Office (GAO), issued a recent report charging that private Social Security accounts would reduce disability benefits.

Opponents of personal accounts, such as Sen. Tom Harkin (D‐​Iowa), have wielded the GAO report like a club. But a closer look at both the GAO report and privatization experiments here and abroad reveals that the real threat to disabled workers is the current system’s looming insolvency. Privatization, rather than being a danger to the disabled, could actually lead to higher benefits at a lower cost.

The GAO study looked at three congressional plans that would allow workers to invest part of their payroll taxes in personal accounts similar to IRAs or 401(k)s. Payroll taxes for Social Security’s disability program, which are 1.8 percentage points of the 12.4 percent total tax, would not be invested. But the GAO found that these plans provided lower benefits to many disabled workers than the current system promises. That’s because Social Security’s disability benefit is based on the same formula as its retirement benefit. If workers divert some of their payroll taxes into personal accounts, that money won’t count toward their disability benefit.

This snag in the benefit formula is a real problem but easily solvable. Indeed, one of the bipartisan plans — proposed by Sens. Charles Grassley (R‐​Iowa), Judd Gregg (R-N.H.), John Breaux (D‐​La.), and former Sen. Bob Kerrey (D‐​Neb.) — would provide vulnerable lower‐​income disabled workers with substantially higher benefits than the current system promises. And congressional staffers say the other proposals are being amended to fix the quirk.

Nevertheless, privatization critics like Harkin are unconvinced. “This report shows that millions of people with disabilities have been forgotten in the broader conversation about Social Security reform, and as a result we could actually roll the clock back for them and their families,” Harkin said. Some critics even imply that personal accounts plans could increase homelessness among disabled workers.

Such apocalyptic warnings are mere scare tactics. The GAO study compares what partial privatization plans can actually pay with what the current pay‐​as‐​you‐​go system only promises to pay. But as the GAO itself admits, the current system can meet its benefit promises only with a 50 percent hike in payroll taxes, while these privatization plans maintain the current 12.4 percent tax rate. Critics are comparing apples and oranges. When we compare what these partial privatization plans can actually pay with what Social Security can actually pay, personal accounts would provide disability benefits some 25 percent to 45 percent higher.

More important, experience with Social Security privatization in the United States and abroad proves that personal accounts pay substantially higher disability benefits than the current system. For instance, the city of Galveston, Texas, opted out of Social Security in 1981 and its workers receive retirement and disability benefits through personal accounts. A 1999 GAO study found that a 21‐​year‐​old low‐​income disabled worker would receive $829 per month from the personal account plan, while a similar worker would receive nothing from Social Security. Among older low‐​income workers, Galveston’s disability benefits averaged between 50 percent and 100 percent higher than under Social Security.

The South American country of Chile, which has a fully privatized Social Security system, is another good example. A 1996 study found total disability benefits averaging 75 percent more under privatization than under the prior government‐​funded system. Moreover, the Chilean system offers benefits for partial disability, helping such individuals remain in the workforce. The U.S. system offers no such protections.

Personal accounts offer higher disability benefits for the same reason they would pay higher retirement benefits: stocks and bonds deliver higher rates of return. As a result, private plans can offer higher disability benefits with lower contributions. The sooner we move to personal accounts the better off disabled workers and all workers will be.

About the Author
Andrew G. Biggs
Former Social Security analyst and Assistant Director of the Project on Social Security Choice