Cato Launches Social Security Privatization Effort

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Leading academics and experts in the fields of economics, finance, and government helped launch Cato’s Project on Social Security Privatization on August 14, the 60th anniversary of the government pension program. The goal of the project is to develop a viable blueprint for privatizing Social Security. Drawing on the successful privatization of the public pension system of Chile, the project will have four fundamental components: an assessment of the current state of Social Security, a survey of the transition problems of privatization, crafting design options for privatization, and a marketing and outreach program.

The project was launched with a news conference at the National Press Club featuring co‐​chairmen Jose Piñera, the architect of Chile’s pension privatization, and William Shipman, one of the nation’s leading financial analysts. Also participating in the news conference were project director Michael Tanner, Cato’s director of health and welfare studies, and project advisory committee members Dorcas Hardy, former commissioner of Social Security, and Timothy J. Penny, former Democratic congressman from Minnesota. The following day Piñera spoke about the privatization plan at a lunch sponsored by the Federal Reserve Bank of Dallas.

Pinera, formerly Chile’s minister of labor and social welfare and now the head of the International Center for Pension Reform, told the news conference that “the United States, like many other countries in the developed world, depends upon a government Social Security system that has a fundamental flaw. It is a pay‐​as‐​you‐​go system, and as such, it breaks the link between what people contribute to a system and what people take out of the system. In Chile, we found tremendous popular support for switching to a system in which people actually own their retirement accounts, and in just 15 years, they have seen their retirement incomes rise to levels 40 to 50 percent higher than the old ones.” He added that “the United States has a tremendous opportunity. It can make the transition to a privatized system now, before the current system’s crisis arrives with full force.”

The project also released two studies. In “Dismantling the Pyramid: The Why and How of Privatizing Social Security,” Karl Borden, professor of financial economics at the University of Nebraska, points out that Social Security is analogous in design to illegal pyramid schemes. Government accounting creates the illusion of a trust fund, Borden writes, but, in fact, excess receipts are spent immediately. He notes that the government’s own actuaries predict that the system will be bankrupt by 2030 but that Social Security could face financial crisis as early as 2014. Moreover, he says, Social Security’s relatively poor rate of return makes the program an increasingly worse investment for today’s young workers. Borden concludes that only private pensions with individual property rights to accumulated fund balances can create a secure retirement system.

Various reform plans have been proposed for the United States, including recent legislation by Sens. Alan Simpson (R‐​Wyo.) and Bob Kerrey (D‐​Neb.), but Borden calls instead for a much bolder approach: “A plan that achieves the dual objectives of security and personal liberty would divert current Old‐​Age and Survivors and Disability Insurance payments to private personal retirement accounts, similar to individual retirement accounts, managed by the financial securities industry.”

The second study, “Retiring with Dignity: Social Security vs. Private Markets,” by Shipman, emphasizes the superior returns that a private pension would provide. “History shows that the financial return on [private financial] instruments exceeds retirement needs at a fraction of Social Security’s cost,” Shipman writes. “For example, assuming historic rates of return, if individuals born in 1970 were allowed to invest in stocks the amount they currently pay in Social Security taxes, those individuals could receive nearly six times the benefits that they are scheduled to receive under Social Security, as much as $11,182 per month. Even a low‐​wage earner would receive nearly three times the return on Social Security.”