Social Security Privatization: Bad for the Disabled?

This essay originally appeared on Copyright 2001 National Review.

Critics of Social Security privatization will say almost anything to makesure this good idea never becomes law. Their latest claim is that lettingworkers invest part of their Social Security taxes in personal retirementaccounts would thrust disabled Americans into poverty. Don't believe it.

Social Security is more than a retirement program. It also provides monthlypayments to workers who become permanently disabled. So it was eye-openingwhen the federal government's investigative arm, the General AccountingOffice (GAO), issued a recent report charging that private Social Securityaccounts would reduce disability benefits.

Opponents of personal accounts, such as Sen. Tom Harkin (D-Iowa), havewielded the GAO report like a club. But a closer look at both the GAO reportand privatization experiments here and abroad reveals that the real threatto disabled workers is the current system's looming insolvency.Privatization, rather than being a danger to the disabled, could actuallylead to higher benefits at a lower cost.

The GAO study looked at three congressional plans that would allow workersto invest part of their payroll taxes in personal accounts similar to IRAsor 401(k)s. Payroll taxes for Social Security's disability program, whichare 1.8 percentage points of the 12.4 percent total tax, would not beinvested. But the GAO found that these plans provided lower benefits to manydisabled workers than the current system promises. That's because SocialSecurity's disability benefit is based on the same formula as its retirementbenefit. If workers divert some of their payroll taxes into personalaccounts, 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. BobKerrey (D-Neb.) -- would provide vulnerable lower-income disabled workerswith substantially higher benefits than the current system promises. Andcongressional staffers say the other proposals are being amended to fix thequirk.

Nevertheless, privatization critics like Harkin are unconvinced. "Thisreport shows that millions of people with disabilities have been forgottenin the broader conversation about Social Security reform, and as a result wecould actually roll the clock back for them and their families," Harkinsaid. Some critics even imply that personal accounts plans could increasehomelessness among disabled workers.

Such apocalyptic warnings are mere scare tactics. The GAO study compareswhat partial privatization plans can actually pay with what the currentpay-as-you-go system only promises to pay. But as the GAO itself admits, thecurrent system can meet its benefit promises only with a 50 percent hike inpayroll taxes, while these privatization plans maintain the current 12.4percent tax rate. Critics are comparing apples and oranges. When we comparewhat these partial privatization plans can actually pay with what SocialSecurity can actually pay, personal accounts would provide disabilitybenefits some 25 percent to 45 percent higher.

More important, experience with Social Security privatization in the UnitedStates and abroad proves that personal accounts pay substantially higherdisability benefits than the current system. For instance, the city ofGalveston, Texas, opted out of Social Security in 1981 and its workersreceive retirement and disability benefits through personal accounts. A 1999GAO 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 wouldreceive nothing from Social Security. Among older low-income workers,Galveston's disability benefits averaged between 50 percent and 100 percenthigher than under Social Security.

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

Personal accounts offer higher disability benefits for the same reason theywould pay higher retirement benefits: stocks and bonds deliver higher ratesof return. As a result, private plans can offer higher disability benefitswith lower contributions. The sooner we move to personal accounts the betteroff disabled workers and all workers will be.