A Poor Excuse for Opposing Privatization

This article appeared on Cato.org on August 18, 1999.
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Opponents of Social Security privatization argue that letting individuals invest their payroll taxes would enrich the well-to-do while leaving the poor behind. "It's obvious that poor workers and their children would not do better under a privatized Social Security scheme," claims Sharon Daly of Catholic Charities. Liberal activist Peter Barnes says that "Social Security isn't so much a government program as it is a compact between generations -- an extension of family values to the nation at large. This compact vows that each generation, as it ages, will be supported by the generation it raised. No one who has labored will die in poverty." Even Republican Congressman Bill Archer calls Social Security "the country's greatest anti-poverty program."

Notwithstanding the fact that a compact requires agreement -- and I don'trecall agreeing to fork over an eighth of my income to a program that won'tpay it back -- Social Security has left unkept the promises made for it.Contrast the lofty rhetoric with this reality: despite Social Security,10.5 percent of Americans over 65, 3.4 million in all, live below thepoverty line of $8,480, according to the Bureau of the Census. Povertyafflicts 23.8 percent of older Hispanics and 26 percent of blacks. After2014, as Social Security's insolvency forces tax increases and benefitcuts, the plight of low-income retireeswill worsen. If Social Security is America's greatest anti-povertyprogram, why are millions of seniors dying in poverty?

Defenders of the status quo counter that, lacking Social Security, evenmore seniors would be indigent. But that assumes that Social Securitycomes for free. Social Security isn't supposed to be a welfare program --Americans receiving benefits paid into the system while working. They havea right to ask what they are getting for their money and why, despite alifetime of payroll tax contributions, millions die destitute.

Opponents of privatization reply that Social Security is but one leg of athree-legged stool, with employer-sponsored pensions and private savingscompleting retirement provisions. But that is a cop-out. As SocialSecurity payroll taxes have risen -- from 2 percent of the first $3,000 ofwages at the program's inception to 12.4 percent of the first $72,600 today-- personal savings have been crowded out and seniors have become ever morereliant on Social Security.

In the July/August issue of the American Prospect, David Callahan pointsout the obvious: "America's social insurance system for the elderly todayfaces two major problems: it may be heading toward fiscal crisis ifeconomic growth slows and, at the same time, it does not offer adequateprotection to low-income elders against poverty and even hunger." So longas Social Security retains its pay-as-you-go financing, it is impossible tomaintain benefits without raising taxes. Increasing benefits isalmost out of the question. But it doesn't have to be this way.

There is one solution that addresses the dual problems of inadequatebenefits and looming insolvency: privatization. Retirement security, evenfor the poorest working Americans, need not depend on charity from othersor welfare from the government. All that is required is a system thatsaves rather than spends, that gives Americans the option of personalretirement accounts funded out of their payroll taxes. Personal investmentwould eradicate poverty in retirement, and give workers control over theirretirement savings and the security that comes from owning an asset thatcannot be cut or taken away.

Hence, the question is not what the poverty rate would be for America'selderly without Social Security. It is what it would be were workersallowed to invest through personal accounts. A minimum-wage workerinvesting only the retirement portion of his payroll taxes in a mutual fundreturning the stock market average since 1800 would amass, after 45 years,savings of $358,000 (in 1999 dollars). Interest income alone could providehim a monthly income of almost $1,200, leaving the principal untouched forhis heirs. Social Security, by contrast, would pay around $750. That isnot to say that a person living near the poverty line doesn't need help.But Social Security is the kind of help he doesn't need.

A private pension manger who took 12.4 percent of a worker's wages and lefthim in poverty might well find himself in jail.For a mandatory government program to do so is an injustice. By thatstandard, Social Security has manifestly failed. It is time to givesomething better a try.

Andrew G. Biggs

Andrew Biggs is a Social Security analyst with the Cato Institute.