No Second Best: The Unappetizing Alternatives to Social Security Privatization

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Although proposals for privatizing SocialSecurity have been much debated, there hasbeen far less discussion of the alternatives.Indeed, most opponents of privatization wouldprefer to avoid comparing various proposals forreform. That is probably because their alternativesboil down to some very unpopularoptions — raising taxes, cutting benefits, or governmentinvestment in the stock market.

Not surprisingly, the alternative most frequentlysuggested by opponents of privatizationis to increase taxes, either directly or indirectly.Suggested tax changes range from increases inpayroll tax rates or the base income on whichpayroll taxes are collected to the use of generalrevenues and, particularly, repeal of the incometax cuts that passed Congress in 2001. Other taxchanges proposed include increasing capitalgains taxes, taxing all stock transactions,increasing taxes on Social Security benefits,and requiring newly hired state and municipalworkers to participate in Social Security.

Opponents of privatization are also willing toconsider significant cuts in Social Security benefits.Many would increase the computation periodused to calculate benefits — a proposal that wouldbe particularly harmful to women and minorities — and raise the retirement age, which wouldparticularly affect lower‐​income and minorityworkers, who have shorter life expectancies.Others would reduce spousal benefits or trimincreases in cost‐​of‐​living allowances.

Finally, many opponents of individualaccounts would allow the federal governmentto directly invest Social Security funds in privatecapital markets. That approach risks politicizingthe investment process and underminingour free‐​market economic system.

Allowing workers to privately invest SocialSecurity taxes makes sense on its own. It givesworkers ownership of and control over theirmoney, increases rates of return, allows low‐​incomeworkers to accumulate wealth, andmoves the system toward fiscal balance.Compared with the alternatives, privatizationlooks even better.

Download the Social Security Choice Paper

ssp24.pdf

Michael D. Tanner

Michael Tanner is director of the Cato Institute’s Project on Social Security Privatization and coauthor of A New Deal for Social Security (1998).