Retiring with Dignity: Social Security vs. Private Markets

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Retiring with financial dignity is in jeopardy. That is thedirect result of Social Security's ever-expanding role in the economics ofboth retirees and workers. Compassionate in intent, but flawed indesign, Social Security will prevent many from enjoying financial securityin their later years.

Unlike personal savings, pensions, and independent retirementaccounts, all of which are stores of wealth, Social Security is a misguidedpolitical construct, wherein one's retirement benefits aredependent on the willingness of future workers to be taxed.

Benefits paid to present recipients are low. Benefits to bepaid to future recipients will be even lower. Worse, the legal requirementto pay Social Security taxes prevents workers from investing themoney lost to those taxes in higher earning assets.

Beyond that, the unsound financial foundation of the systemvirtually ensures that the promised benefits, low as they are,will be reduced even further. In the past, when Social Security'sfinancial precariousness was addressed, the legislative response was toincrease taxes and reduce benefits. Such responses not onlyfailed to solve the problem, they exacerbated it.

There is a better solution. Allow people the freedom to investtheir Federal Insurance Contributions Act (FICA) taxes in financialassets such as stocks and bonds. History shows that the financialreturn on those instruments meets retirement needs at a fraction ofSocial Security's cost.

For example, assuming historical rates of return, ifindividuals born in 1970 were allowed to invest in stocks the amountthey currently pay in Social Security taxes, those individualscould receive nearly six times the benefits that they arescheduled to receive under Social Security, as much as $11,729per month. Even a low-wage earner would receive nearly threetimes the return on Social Security.

The idea of privatizing a public pension system is neither newnor untried. Where it has been properly implemented, it has beenremarkably successful. For governments, privatization is the onlyviable answer to Social Security's inherent problems; for individuals,it is a profitable one.

Download the Social Security Choice Paper


William G. Shipman

William G. Shipman is a principal with State Street Global Advisors in Boston and cochairman of the Cato Institute's Project on Social Security Privatization.