Latest Cato Research on Personal Accounts https://www.cato.org/rss/research/personal-accounts en Michael D. Tanner discusses social security reform on WWL's First News with Tommy Tucker https://www.cato.org/multimedia/media-highlights-radio/michael-d-tanner-discusses-social-security-reform-wwls-first-0?utm_source=rss_topic&utm_medium=rss&utm_campaign=rss Tue, 09 Jul 2019 10:45:00 -0400 Michael D. Tanner https://www.cato.org/multimedia/media-highlights-radio/michael-d-tanner-discusses-social-security-reform-wwls-first-0 Michael D. Tanner’s social security research is cited on The Larry Elder Show https://www.cato.org/multimedia/media-highlights-radio/michael-d-tanners-social-security-research-cited-larry-elder-show?utm_source=rss_topic&utm_medium=rss&utm_campaign=rss Tue, 19 Mar 2019 11:39:00 -0400 Michael D. Tanner https://www.cato.org/multimedia/media-highlights-radio/michael-d-tanners-social-security-research-cited-larry-elder-show James A. Dorn discusses stock market on KSRO's Sonoma County's Morning News https://www.cato.org/multimedia/media-highlights-radio/james-dorn-discusses-stock-market-vitality-ksros-sonoma-countys?utm_source=rss_topic&utm_medium=rss&utm_campaign=rss Fri, 09 Feb 2018 11:19:00 -0500 James A. Dorn https://www.cato.org/multimedia/media-highlights-radio/james-dorn-discusses-stock-market-vitality-ksros-sonoma-countys Veronique de Rugy discusses "baby bonds" on NPR's A1 https://www.cato.org/multimedia/media-highlights-radio/veronique-de-rugy-discusses-baby-bonds-nprs-a1?utm_source=rss_topic&utm_medium=rss&utm_campaign=rss Wed, 10 Jan 2018 11:54:00 -0500 Veronique de Rugy https://www.cato.org/multimedia/media-highlights-radio/veronique-de-rugy-discusses-baby-bonds-nprs-a1 José Piñera gives a lecture "How Market Reforms Transformed Chile" hosted by the Friedberg Economics Institute https://www.cato.org/multimedia/media-highlights-tv/jose-pinera-gives-lecture-how-market-reforms-transformed-chile-hosted?utm_source=rss_topic&utm_medium=rss&utm_campaign=rss Sat, 19 Nov 2016 14:16:00 -0500 José Piñera https://www.cato.org/multimedia/media-highlights-tv/jose-pinera-gives-lecture-how-market-reforms-transformed-chile-hosted Steve H. Hanke discusses Chile's private pension plan on Bloomberg TV Bulgaria’s Boom & Bust https://www.cato.org/multimedia/media-highlights-tv/steve-h-hanke-discusses-chiles-private-pension-plan-bloomberg-tv?utm_source=rss_topic&utm_medium=rss&utm_campaign=rss Fri, 02 Sep 2016 12:12:00 -0400 Steve H. Hanke https://www.cato.org/multimedia/media-highlights-tv/steve-h-hanke-discusses-chiles-private-pension-plan-bloomberg-tv José Piñera is featured in a segment on "The importance of José Piñera in the 80's pension reform" on Cultura Verdadera https://www.cato.org/multimedia/media-highlights-tv/jose-pinera-featured-segment-importance-jose-pinera-80s-pension?utm_source=rss_topic&utm_medium=rss&utm_campaign=rss Mon, 18 Jul 2016 13:54:00 -0400 José Piñera https://www.cato.org/multimedia/media-highlights-tv/jose-pinera-featured-segment-importance-jose-pinera-80s-pension President Clinton and the Chilean Model https://www.cato.org/policy-report/januaryfebruary-2016/president-clinton-chilean-model?utm_source=rss_topic&utm_medium=rss&utm_campaign=rss José Piñera <div class="lead text-default"> <p>"It's 12:30 or 1 at night, and Bill Clinton asks me and Dottie: ‘What do you know about the Chilean social security system?'" recounted Richard Lamm, the three-term former governor of Colorado. It was March 1995, and Lamm and his wife were staying that weekend in the Lincoln Bedroom of the White House.</p> </div> , <div class="text-default"> <p>I read about this surprising midnight conversation in a <em>Newsweek</em> article by Jonathan Alter (May 13, 1996), as I was waiting at Dulles International Airport for a flight to Europe. The article also said that early the next morning, before he left to go jogging, President Bill Clinton arranged for a special report about the Chilean reform produced by his staff to be slipped under Lamm's door.</p> <p>That news piqued my interest, so as soon as I came back to the United States, I went to visit Richard Lamm. I wanted to know the exact circumstances in which the president of the world's superpower engages a fellow former governor in a Saturday night exchange about the system I had implemented 15 years earlier.</p> <p>Lamm and I shared a coffee on the terrace of his house in Denver. He not only was a most genial host to this curious Chilean, but he also proved to be deeply motivated by the issues surrounding aging and the future of America. So we had an engaging conversation. At the conclusion, I ventured to ask him for a copy of the report that Clinton had given him. He agreed to give it to me on the condition that I not make it public while Clinton was president. He also gave me a copy of the handwritten note on White House stationery, dated 3-21-95, which accompanied the report slipped under his door. It read:</p> </div> , <blockquote class="blockquote"> <div> <p>Dick, Sorry I missed you this morning. It was great to have you and Dottie here. Here's the stuff on Chile I mentioned. Best, Bill</p> </div> </blockquote> <cite> </cite> , <div class="text-default"> <p>Three months before that Clinton-Lamm conversation about the Chilean system, I had a long lunch in Santiago with journalist Joe Klein of <em>Newsweek</em> magazine. A few weeks afterwards, he wrote a compelling article entitled, "If Chile Can Do It ... Couldn't (North) America Privatize Its Social-Security System?" He concluded by stating that "the Chilean system ... is perhaps the first significant social-policy idea to emanate from the Southern Hemisphere" (December 12, 1994).</p> <p>I have reasons to think that probably this piece got Clinton's attention and, given his passion for policy issues, he became a quasi-expert on Chile's social security reform. Clinton was familiar with Klein, who covered the 1992 presidential race and went on anonymously to write the bestseller <em>Primary Colors</em>, a thinly veiled account of Clinton's campaign.</p> <p><strong>"THE MOTHER OF ALL REFORMS"</strong><br />While studying for a master's and a PhD in economics at Harvard University, I became enamored with America's unique experiment in liberty and limited government. In 1835 Alexis de Tocqueville wrote the first volume of <em>Democracy in America</em>, hoping that many of the salutary aspects of American society might be exported to his native France. I dreamed of exporting them to my native Chile.</p> <p>So, upon finishing my PhD in 1974 and while fully enjoying my position as a teaching fellow at Harvard and a professor at Boston University, I took on the most difficult decision in my life: to go back to help my country rebuild its destroyed economy and democracy along the lines of the principles and institutions created in America by the Founding Fathers.</p> <p>Soon I became Secretary of Labor and Social Security, and in 1980 I was able to create a fully funded system of personal retirement accounts. Historian Niall Ferguson wrote in The Ascent of Money that this reform was "the most profound challenge to the welfare state in a generation. Thatcher and Reagan came later. The backlash against welfare started in Chile."</p> <p>Unfortunately, at some point during the 20th century, the culture of self reliance and individual responsibility that had made America a great and free nation was diluted by the creation of an entitlement state, reminiscent of the increasingly failed European welfare state. What America needed was a return to basics, to the founding tenets of limited government and personal responsibility.</p> <p>In a way, the principles America helped export so successfully to Chile through a group of free-market economists needed to be reaffirmed in their home country through an emblematic reform. I felt that the Chilean solution to the impending Social Security crisis could be applied in the United States. Once my country had finished its transition to democracy and once I had done everything possible to ensure the stability of its free market model and its structural reforms, including my own "educational" presidential campaign in 1993, I decided to dedicate my life to sharing the Chilean Model around the world.</p> <p>At the same time, at the beginning of 1995, when President Clinton was having midnight conversations about the Chilean Model, I received an extraordinary invitation that would greatly help my fight for America. Ed Crane, co-founder and president of the libertarian Cato Institute, invited me to become a distinguished senior fellow and co-chairman of its Social Security Choice Project. I accepted immediately.</p> <p>Cato had been publishing books and studies on Social Security and private accounts since 1979 and was then gearing up for a new push. In the following years I traveled around the United States sharing the Chilean experience in conferences, town hall meetings, congressional hearings, and media interviews. The audiences were extremely receptive and interested, but what Milton Friedman called "the tyranny of the status quo" made it difficult for political leaders to embrace such a new solution to the growing Social Security problem.</p> <p>However, in January 1996, Mack McLarty, President Clinton's special envoy to the Americas and former chief of staff, traveled to Chile and wanted to know firsthand about the success of the first private personal accounts system in the world. We met for hours and he quizzed me about both the principles and the details of the system. A few weeks later, I received a letter from him with an enthusiastic message:</p> </div> , <blockquote class="blockquote"> <div> <p>José, Without doubt, the reform of Chile's pension system has been a critical contributing factor — some have called it the mother of all reforms — to Chile's ongoing economic success. The social security reforms which you developed and fought for have put your country on a stable footing for the future.</p> <p>Although the Chilean and North American experiences are different in several key respects, I believe we can learn a great deal from your country's bold initiative, which is widely envied throughout the hemisphere.</p> </div> </blockquote> <cite> </cite> , <div class="text-default"> <p><strong>A LETTER TO THE PRESIDENT OF THE UNITED STATES</strong><br />Then, in his January 1998 State of the Union address, President Clinton warned the nation of the coming Social Security crisis and called for an open debate on the needed reforms: "We will hold a White House conference on Social Security in December. And one year from now, I will convene the leaders of Congress to craft historic bipartisan legislation to achieve a landmark for our generation, a Social Security system that is strong in the 21st century."</p> <p>On the heels of this speech, I realized that no momentum could be lost. I needed to reach the president himself. Knowing Clinton's reputation as a voracious reader, I resolved to write an open letter to the president in a major newspaper, where he was sure to take notice. And so that April, at a Tokyo conference organized by the Cato Institute and the powerful Keidanren, the Japanese business association, I broached the idea of my open letter to a fellow speaker, George Melloan of the <em>Wall Street Journal</em>. He told me it was highly unusual for the <em>Journal</em> to publish such a piece, but after reading a draft he enthusiastically accepted. Melloan asked me to send it by fax to the <em>Journal</em>'s Americas columnist Mary O'Grady in New York. From the Imperial Hotel my Cato colleague Bob Borens and I spent the whole night exchanging faxes between Tokyo and downtown New York, revising every comma of the draft until we were all fully satisfied.</p> <p>The letter was published on the editorial page on April 10, 1998. In it I described the success of the Chilean reform and urged the president to embrace a private-accounts option for Social Security, to avert the looming insolvency and to spread wealth more widely.</p> <p><strong>THE WHITE HOUSE SUMMIT ON SOCIAL SECURITY</strong><br />My expectations were surpassed when I received an invitation from Gene Sperling, economic policy adviser to the president, to speak on private accounts at the coming White House Conference on Social Security, to an audience from all areas of civil society: senior groups, youth organizations, think tanks, labor unions, business leaders and academia. Perhaps more importantly, a bipartisan assortment of 60 members of the House and Senate would be in attendance, along with other officials from the administration.</p> <p>The stakes were high. In a press briefing on December 2, 1998, in the week leading up to the White House conference, Sperling declared that the summit was needed "to derail the third-rail mentality that has often stifled Social Security reform." He showed a keen awareness of the moment:</p> </div> , <blockquote class="blockquote"> <div> <p>I think the political realities are that 1999, as an off-election year with a Democratic president in his second term, and a year of focus on Social Security that we have had, offers a unique opportunity to address this, and also with having the strong fiscal situation that we're in. So I think, in a practical, political sense, one does have to worry that if we do not get Social Security reform done this year, we do not have a good effort, that one does not know when another opportunity will come that is as opportune as this.</p> </div> </blockquote> <cite> </cite> , <div class="text-default"> <p>While I was both honored and humbled to be invited, especially given the fact that I was the only speaker who didn't possess an American passport, I was at the same time sobered by the inherent challenges of such an address. In just a few minutes, I would need to introduce my prior involvement with social security reform in Chile, outline the technical details of the system, and explain why a 1980 economic restructuring in a small, distant nation had relevance to the American way of life.</p> <p>As the C-SPAN cameras rolled, I delivered the message I had wanted so long to give.</p> </div> , <blockquote class="blockquote"> <div> <p>Every Chilean worker has a pension passbook — I always carry one of them. The worker has his money put here in the passbook and they know every month how much money they have. And they accumulate money during all their working life, and in this way we have allowed the working poor to benefit from that extraordinary force of compound interest ...</p> <p>We gave every worker the choice to stay in the old system if they didn't like this very small element of market risk and preferred the demographic or political risk. Or, they could move to the new system with recognition bonds recognizing their past contributions. Ninety-three percent of Chilean workers have chosen the system of the passbook, rather than the pay-as-you-go system. ...</p> <p>So, the reform was not about savings or about macroeconomic equilibrium. It was about workers' dignity, workers' freedom, workers' choice, and workers' empowerment. I believe this can be done in America.</p> <p>In Chile, no one was investing in stocks 18 years ago. In your country, you have 40 percent that are already investing in stocks. You have the best capital markets in the world that can diminish risk to a tolerable level. The technological revolution is allowing individuals to manage millions of accounts at negligible costs. And finally, you are such an open-minded country that you have invited a Chilean to be here.</p> <p>So, I have enormous hope for this country that I love. And I would like my son, who was born in Boston and carries an American passport, to also be able to someday have a pension retirement passbook like this.</p> </div> </blockquote> <cite> </cite> , <div class="text-default"> <p><strong>SEX AND SOCIAL SECURITY</strong><br />Two months later, President Clinton said in his January 1999 State of the Union address:</p> </div> , <blockquote class="blockquote"> <div> <p>Our fiscal discipline gives us an unsurpassed opportunity to address a remarkable new challenge: the aging of America. With the number of elderly Americans set to double by 2030, the baby boom will become a "senior boom." ... The best way to keep Social Security a rock-solid guarantee is not to make drastic cuts in benefits; not to raise payroll tax rates; and not to drain resources from Social Security in the name of saving it. ... I propose a new pension initiative for retirement security in the 21st century. I propose that we use a little over 11 percent of the surplus to establish universal savings accounts — USA accounts — to give all Americans the means to save. With these new accounts, Americans can invest as they choose, and receive funds to match a portion of their savings, with extra help for those least able to save. USA accounts will help all Americans to share in our nation's wealth, and to enjoy a more secure retirement.</p> </div> </blockquote> <cite> </cite> , <div class="text-default"> <p>The opening salvo had been fired: "to establish universal savings accounts — USA accounts." This was the first time that a sitting president had called for the creation of personal retirement accounts.</p> <p>But regrettably it was not to be. Just as Clinton was gearing up to reform Social Security, he found himself unexpectedly mired in the Monica Lewinsky scandal. The affair was a disgraceful event indeed, but it was the process of impeachment of the president that buried the possibility of making this reform at that moment.</p> <p>Reality quickly set in: the besieged president could not deliver on his proposal, no matter how genuinely he knew the country needed it. As a <em>New York Times</em> editorial asserted the day after his address, "since the Republicans control Congress and the impeachment battle will probably leave a bitter aftertaste, the President's plans are certain to be more of a conversation opener than a blueprint for the future."</p> <p>Even though Clinton was acquitted by the Senate and thus allowed to remain in office, the ordeal exhausted both his political capital and his resolve to tackle major reforms. Clinton would not spearhead any major legislation during the remainder of his term. The Social Security time bomb would be passed along to a successor. A vital opportunity had been squandered.</p> <p>In his 2002 book <em>The Natural: The Misunderstood Presidency of Bill Clinton</em>, Joe Klein, after many hours of conversations with the former president, drew the following conclusion:</p> </div> , <blockquote class="blockquote"> <div> <p>The Lewinsky scandal had a powerful, if usually overlooked, impact on the substance of Clinton's last two years in office as well. When I asked the President what he might have accomplished absent the scandal, he said that he wasn't sure. When pressed, Clinton acknowledged that he might have been able to reform the Social Security and Medicare systems if the Republicans — and the media — hadn't been provided with an alternative form of diversion in 1998 and 1999. In fact, Clinton was poised, at the moment he delivered his "Save Social Security First" challenge in the 1998 State of the Union message, to do something few presidents ever had: to end his second term with a valedictory surge of significant accomplishments. He had tamed the Republican Congress. There were huge budget surpluses to play with. "Both parties were behind the curve on the big issues," said Bruce Reed, Clinton's domestic policy advisor. ... "We could have added a private-investment option on to Social Security benefits."</p> </div> </blockquote> <cite> </cite> , <div class="text-default"> <p>As one journalist stated, Clinton sacrificed "an enduring legacy when he had an affair with Lewinsky, the young White House intern. Liberal Democrats were opposed to his pension changes, so to get their support to avoid impeachment, Clinton postponed the package of reforms."</p> <p>Three Clinton advisers — Douglas W. Elmendorf, Jeffrey B. Liebman, and David W. Wilcox — would later write a paper confirming that the possibility existed and that the impeachment destroyed it. As Glenn Kessler summarized it in the <em>Washington Post</em>: "In 1998 President Clinton and his economic advisers spent 18 months secretly discussing the elements of a plan to add individual investment accounts to Social Security, but abandoned it when it became clear the president would be impeached, according to a paper by three former administration officials that will be presented today at a Harvard conference."</p> <p>As in a Greek tragedy, Clinton's failure to reform Social Security can be explained in terms of his tragic flaw. Clinton was undoubtedly an extremely gifted politician and a very intelligent man, but regrettably he was not a statesman willing to sacrifice earthly pleasures for a lasting legacy. It was proven that he did not belong, in the immortal words of Lincoln, "to the family of the lion, or the tribe of the eagle."</p> <p>It is astounding how our human imperfections can have unintended consequences of enormous importance. As I traveled back all night to my country in those early months of 1999, knowing full well that though the seed had been planted the flower would not bloom during the Clinton presidency, I kept coming back to the achingly beautiful words that Shakespeare gave Hamlet:</p> </div> , <blockquote class="blockquote"> <div> <p>Blest are those<br />Whose blood and judgment are so well commingled,<br />That they are not a pipe for fortune's finger<br />To sound what stop she please. Give me that man<br />That is not passion's slave, and I will wear him<br />In my heart's core, ay, in my heart of heart...</p> </div> </blockquote> <cite> </cite> , <div class="text-default"> </div> Thu, 28 Jan 2016 16:53:00 -0500 José Piñera https://www.cato.org/policy-report/januaryfebruary-2016/president-clinton-chilean-model Horse and Buggy Program in the Age of the Internet https://www.cato.org/publications/commentary/horse-buggy-program-age-internet?utm_source=rss_topic&utm_medium=rss&utm_campaign=rss Michael D. Tanner <div class="lead text-default"> <p>Will Social Security be around when millennials retire? Certainly. Will it be able to pay them anything close to what they have been promised? Certainly not.</p> </div> , <div class="text-default"> <p>According to the report issued recently by Social Security's trustees, the program spent $73.1 billion more last year than it took in through non-interest income. By 2020 this gap will grow to $108.7 billion, and surge to almost $200 billion by 2024. Overall, Social Security's unfunded liabilities now approach $26 trillion.</p> <p>Of course, some will say that there's no reason to worry because the Social Security Trust Fund will keep the program afloat until 2034. 2034? That should be great comfort to millennials.</p> <p></p> </div> , <aside class="aside--right aside pb-lg-0 pt-lg-2"> <div class="pullquote pullquote--default"> <div class="pullquote__content h2"> <p>Let young workers who wish to get out of this pyramid scheme do so, and save a portion of their taxes for their own retirement through personal accounts.</p> </div> </div> </aside> , <div class="text-default"> <p>But even that is misleading. Any annual Social Security surpluses, when it has them, are used to purchase special issue government bonds, which became so-called Trust Funds to pay future benefits. Of course, once a bond was purchased, the money used to buy it became general revenue and was spent by the government. So the Trust Funds are simply an accounting measure of how much money the Social Security system is owed by the federal government. The bonds are basically IOUs.</p> <p>That's not to say that the government won't make good on that debt. It always has and likely always will. But the money needed to redeem the $2.7 trillion in assets currently in the Trust Funds comes from the government's general revenue — that is, the taxes being paid by today's workers. There's no free lunch.</p> <p>And, as noted, the Trust Fund will be empty by 2034. That's the point at which Social Security will have to make do with only the tax revenue it brings in, meaning it will either have to raise payroll taxes by 30 percent or cut benefits by 21 percent, with even larger changes in later years. Welcome to retirement millennials.</p> <p>Moreover, even if Social Security could pay every penny in promised benefits, it would still be a bad deal for millennials. Taxes are already so high relative to benefits that they will receive a return far below what they could have earned from investing their money privately. The tax increases or benefit cuts needed to keep Social Security solvent will just make that bad deal worse.</p> <p>There is only one other answer to Social Security's growing crisis: Let young workers who wish to get out of this pyramid scheme do so, and save a portion of their taxes for their own retirement through personal accounts. Allow that money to be invested in assets that earn a return, such as stocks, bonds, annuities and so forth.</p> <p>Social Security is a horse and buggy program in an Internet era. It is time to bring it up to date. If not, one hopes millennials have a very large piggy bank.</p> </div> Thu, 06 Aug 2015 16:04:00 -0400 Michael D. Tanner https://www.cato.org/publications/commentary/horse-buggy-program-age-internet Reforming SSDI for the 21st Century https://www.cato.org/regulation/summer-2015/reforming-ssdi-21st-century?utm_source=rss_topic&utm_medium=rss&utm_campaign=rss Wed, 17 Jun 2015 10:50:00 -0400 A. Bentley Hankins, Jeffrey D. Joy https://www.cato.org/regulation/summer-2015/reforming-ssdi-21st-century Obama's Odd myRA Proposal https://www.cato.org/multimedia/daily-podcast/obamas-odd-myra-proposal?utm_source=rss_topic&utm_medium=rss&utm_campaign=rss Jagadeesh Gokhale <p>The President’s myRA proposal aimed at helping low-income Americans save for retirement seems to have missed a key element of helping low-income people save more: the tax break provided by traditional IRAs. The myRA proposal doesn’t provide that break and, says Jagadeesh Gokhale, that makes it an inapt savings vehicle for people with low incomes.</p> Wed, 05 Mar 2014 17:17:00 -0500 Jagadeesh Gokhale https://www.cato.org/multimedia/daily-podcast/obamas-odd-myra-proposal MyRA Will Leave America Poorer https://www.cato.org/publications/commentary/myra-will-leave-america-poorer?utm_source=rss_topic&utm_medium=rss&utm_campaign=rss Mark A. Calabria <div class="lead text-default"> <p>President Barack Obama recently unveiled MyRA, a savings plan to allow Americans without employer-provided retirement accounts to invest in U.S. government bonds. His desire to improve the public’s meager personal savings rate of around 4 percent is laudable, but MyRA misses the mark. In fact, it pushes investors toward what is basically a government-run Ponzi scheme.</p> </div> , <div class="text-default"> <p>Here’s how MyRA would function: Workers living in households earning up to $191,000 and without access to employer-provided retirement would give some portion of their after-tax paycheck to the federal government. The federal government would then spend that money, giving the saver a “promise” of repayment in the future. In other words: MyRA investors would be giving the federal government a loan.</p> <p></p> </div> , <aside class="aside--right aside pb-lg-0 pt-lg-2"> <div class="pullquote pullquote--default"> <div class="pullquote__content h2"> <p>It pushes investors toward what is basically a government-run Ponzi scheme.</p> </div> </div> </aside> , <div class="text-default"> <p>Some might argue that government will invest that money and grow the economy, thereby yielding a real return on that savings. That argument is wrong. Currently, approximately two-thirds of federal spending is pure transfers — that is, taking money from A and giving it to B. There is no reason to believe the federal government will simply start “investing” the funds provided by MyRA.</p> <p>MyRA won’t even provide investors a good return. The intent of any retirement savings plan is to build a nest egg for old age. But the returns MyRA plan holders would get from investing in government bonds would be meager.</p> <p>Let’s take the fiscal period immediately following World War II, which is the one that most closely matches our own. Between 1945 and 1980, real (inflation adjusted) interest rates on U.S. treasury debt were negative a fourth of the time, and less than 1 percent two-thirds of the time.</p> <p>For more evidence, look at the federal government’s own bond-based retirement plan, the Thrift Savings Plan. The plan yielded an annualized nominal return of 1.47 percent last year, and the 10-year compounded nominal return was only 3.6 percent. In contrast, TSP’s small/medium-size equity fund returned 10.8 percent over the last 10 years. Any way you slice it, U.S. government bonds offer fairly meager, and often negative, returns.</p> <p>There’s no doubt many Americans are ill-prepared for retirement. Increasing savings is a worthy goal. But the right approach is to first stop taxing interest income, which punishes those who save.</p> <p>The Federal Reserve should then work on returning interest rates to more normal and rational levels, allowing the market to offer a greater incentive for saving.</p> </div> Mon, 10 Feb 2014 09:37:00 -0500 Mark A. Calabria https://www.cato.org/publications/commentary/myra-will-leave-america-poorer Social Security Reform: Does Privatization Still Make Sense? https://www.cato.org/articles/social-security-reform-does-privatization-still-make-sense?utm_source=rss_topic&utm_medium=rss&utm_campaign=rss Tue, 02 Apr 2013 09:21:00 -0400 Jagadeesh Gokhale https://www.cato.org/articles/social-security-reform-does-privatization-still-make-sense Michael D. Tanner discusses privatizing Social Security on CNBC's Closing Bell w/ Maria Bartiromo https://www.cato.org/multimedia/video-highlights/michael-d-tanner-discusses-privatizing-social-security-cnbcs-closing-bell-w-maria-bartiromo?utm_source=rss_topic&utm_medium=rss&utm_campaign=rss Mon, 20 Aug 2012 13:00:00 -0400 Michael D. Tanner https://www.cato.org/multimedia/video-highlights/michael-d-tanner-discusses-privatizing-social-security-cnbcs-closing-bell-w-maria-bartiromo Michael Tanner Talks about Social Security https://www.cato.org/multimedia/cato-video/michael-tanner-talks-about-social-security?utm_source=rss_topic&utm_medium=rss&utm_campaign=rss Michael D. Tanner Social Security's finances have grown steadily worse over the years. Cato Institute Senior Fellow Michael D. Tanner discussed his paper, Still a Better Deal: Private Investment vs. Social Security. Mon, 11 Jun 2012 20:00:00 -0400 Michael D. Tanner https://www.cato.org/multimedia/cato-video/michael-tanner-talks-about-social-security Still a Better Deal: Private Investment vs. Social Security https://www.cato.org/multimedia/cato-video/still-better-deal-private-investment-vs-social-security?utm_source=rss_topic&utm_medium=rss&utm_campaign=rss Michael D. Tanner Critics of private investment of Social Security taxes have long pointed to the supposed dangers of an unstable market as creating conditions too risky to allow workers personal choice in planning for retirement. Indeed, the financial crisis is often used to bolster the argument that retirement funds are best left in the safe hands of the state, but how true is this claim?<br><br>In a new Cato study, "Still a Better Deal: Private Investment vs. Social Security," Cato Senior Fellow Michael Tanner demonstrates that actual investment returns over the past 40 years show that a system of private investment will, in fact, provide significantly higher rates of return than the current Social Security system. Wed, 28 Mar 2012 10:30:00 -0400 Michael D. Tanner https://www.cato.org/multimedia/cato-video/still-better-deal-private-investment-vs-social-security Michael D. Tanner discusses private investment vs Social Security on WABC's Aaron Klein Investigative Radio https://www.cato.org/multimedia/radio-highlights/michael-d-tanner-discusses-private-investment-vs-social-security-wabcs-aaron-klein-investigative-radio?utm_source=rss_topic&utm_medium=rss&utm_campaign=rss Sun, 19 Feb 2012 07:00:00 -0500 Michael D. Tanner https://www.cato.org/multimedia/radio-highlights/michael-d-tanner-discusses-private-investment-vs-social-security-wabcs-aaron-klein-investigative-radio Michael D. Tanner discusses private investment vs Social Security on Fox Business Live https://www.cato.org/multimedia/video-highlights/michael-d-tanner-discusses-private-investment-vs-social-security-fox-business-live?utm_source=rss_topic&utm_medium=rss&utm_campaign=rss Thu, 16 Feb 2012 22:00:00 -0500 Michael D. Tanner https://www.cato.org/multimedia/video-highlights/michael-d-tanner-discusses-private-investment-vs-social-security-fox-business-live Still a Better Deal: Private Investment vs. Social Security https://www.cato.org/publications/policy-analysis/still-better-deal-private-investment-vs-social-security?utm_source=rss_topic&utm_medium=rss&utm_campaign=rss Michael D. Tanner <div class="lead text-default"> <p>Opponents of allowing younger workers toprivately invest a portion of their Social Securitytaxes through personal accounts have longpointed to the supposed riskiness of private investment.The volatility of private capital marketsover the past several years, and especially recentdeclines in the stock market, have seemedto bolster their argument.</p> </div> , <div class="text-default"> <p>However, private capital investment remainsremarkably safe over the long term. Despite recentdeclines in the stock market, a worker whohad invested privately over the past 40 yearswould have still earned an average yearly returnof 6.85 percent investing in the S&amp;P 500, 3.46percent from corporate bonds, and 2.44 percentfrom government bonds.</p> <p>If workers who retired in 2011 had been allowedto invest the employee half of the SocialSecurity payroll tax over their working lifetime,they would retire with more income than if theyrelied on Social Security. Indeed, even in theworst-case scenario—a low-wage worker whoinvested entirely in bonds—the benefits fromprivate investment would equal those from traditionalSocial Security.</p> <p>While there are limits and caveats to thistype of analysis, it clearly shows that the argumentthat private investment is too risky comparedwith Social Security does not hold up.With Social Security already running a cashflowdeficit today—and facing a $21 trillionshortfall in the future that will make it impossibleto pay promised benefits—private investmentand personal accounts should be part ofany discussion about reforming the troubledsystem.</p> </div> Mon, 13 Feb 2012 00:00:00 -0500 Michael D. Tanner https://www.cato.org/publications/policy-analysis/still-better-deal-private-investment-vs-social-security Social Security, Ponzi Schemes, and the Need for Reform https://www.cato.org/publications/policy-analysis/social-security-ponzi-schemes-need-reform?utm_source=rss_topic&utm_medium=rss&utm_campaign=rss Michael D. Tanner <div class="lead text-default"> <p>Recently there has been much debate over whether Social Security is or is not a Ponzi scheme.</p> </div> , <div class="text-default"> <p>Clearly Social Security has many structural characteristics that resemble those of the classic Ponzi or pyramid scheme. For example, like a Ponzi scheme, Social Security does not actually save or invest any of a participant's payments. When a worker pays taxes into the system, that money is used to pay current beneficiaries. Therefore, participants receive payments, not from returns on their own investments, but directly from inflows from subsequent participants.</p> <p>As a result, Social Security was able to pay early participants a windfall return on their money. But as demographic changes result in fewer workers paying into the program and more recipients taking benefits out, the return to subsequent generations grows steadily worse. Today's young workers will receive a rate of return far lower than what they could receive from private markets.</p> <p>However, there is one crucial distinction between Social Security and a Ponzi scheme. Once Ponzi was unable to talk enough people into investing with him, his scheme collapsed. People participate in Social Security because the government makes them. And if the Social Security system begins to run short of people paying into the system, as it is now, it can always force those people to pay more.</p> <p>Yet, Congress's ability to preserve Social Security through higher taxes and lower benefits should not distract from the more fundamental problem that the program's Ponzi-like structure makes it unable to pay currently promised levels of benefits with current levels of taxation. In short, the program is facing insolvency without fundamental reform.</p> <p>Instead of just making a bad deal worse, that reform should fundamentally restructure Social Security. It should remove the Ponzi-like aspects of the program and allow younger workers to save a portion of their payroll taxes through privately invested personal accounts.</p> </div> Thu, 17 Nov 2011 00:00:00 -0500 Michael D. Tanner https://www.cato.org/publications/policy-analysis/social-security-ponzi-schemes-need-reform Jagadeesh Gokhale on the Rhode Island pension reform plan on WPRO https://www.cato.org/multimedia/radio-highlights/jagadeesh-gokhale-rhode-island-pension-reform-plan-wpro?utm_source=rss_topic&utm_medium=rss&utm_campaign=rss Tue, 01 Nov 2011 13:00:00 -0400 Jagadeesh Gokhale https://www.cato.org/multimedia/radio-highlights/jagadeesh-gokhale-rhode-island-pension-reform-plan-wpro Michael D. Tanner discusses Social Security as a Ponzi scheme on WSPD's Brian Wilson Show https://www.cato.org/multimedia/radio-highlights/michael-d-tanner-discusses-social-security-ponzi-scheme-wspds-brian-wilson-show?utm_source=rss_topic&utm_medium=rss&utm_campaign=rss Wed, 28 Sep 2011 13:00:00 -0400 Michael D. Tanner https://www.cato.org/multimedia/radio-highlights/michael-d-tanner-discusses-social-security-ponzi-scheme-wspds-brian-wilson-show GOP Needs an Entitlement Plan https://www.cato.org/publications/commentary/gop-needs-entitlement-plan?utm_source=rss_topic&utm_medium=rss&utm_campaign=rss Michael D. Tanner <div class="lead text-default"> <p>There was telling moment during the CNN Republican presidential debate: Asked about the possibility of repealing George W. Bush's Medicare prescription-drug benefit, which is adding some $17 trillion to Medicare's unfunded liabilities, every one of the candidates pledged varying degrees of fealty to the program. No one came out for significantly cutting this vestige of Bush-style big-government conservatism, let alone repealing it. This put the current crop of Republicans to the left of John McCain, who at least campaigned in favor of means-testing the program in 2008.</p> </div> , <div class="text-default"> <p>The failure to stand up against one of the Bush administration's most obvious mistakes is not just a case of hypocrisy; it is part of a disturbing trend toward ducking the tough decisions on budget cutting among the Republican aspirants. For all the sound and fury, and the charges and countercharges surrounding entitlement reform, the GOP candidates have been remarkably reluctant to put forward actual proposals.</p> <p>Former Massachusetts governor Mitt Romney, for example, has been attacking Texas governor Rick Perry over Social Security from the left, praising the program as "an essential federal program," that has been a "success" for more than 70 years. But for all his criticism of Perry, Romney has been much vaguer about his own plans for reform. At times he has sounded almost like Obama, suggesting that there are lots of reform ideas — raising the retirement age, means testing, changing the wage-price indexing formula — that are "on the table," but not actually endorsing any of them. One reform that Romney has taken off the table is allowing younger workers to privately invest a portion of their payroll taxes through personal accounts. In his book, <em>No Apology</em>, Romney endorses so-called "add on" accounts, allowing workers to save in addition to Social Security, but not carving out a portion of their current taxes. "Given the volatility of investment values that we have just experienced, I would prefer that individual accounts were added to Social Security, not diverted from it," Romney wrote.</p> <p></p> </div> , <aside class="aside--right aside pb-lg-0 pt-lg-2"> <div class="pullquote pullquote--default"> <div class="pullquote__content h2"> <p>The Republican candidates all talk about reducing government spending. But they cannot do that unless they commit to real entitlement reform.</p> </div> </div> </aside> , <div class="text-default"> <p>On Medicare, Romney has avoided specifics as well, praising Paul Ryan's proposed reforms for example as "taking important strides in the right direction," but not endorsing them.</p> <p>For his part, Governor Perry has been forthright about the flaws of Social Security but has offered nothing in the way of a proposal for reform. As Romney has pointed out endlessly, Perry suggested in <em>his</em> book that Social Security might be returned to the states. But Perry has since disavowed that idea, claiming that he was only referring to state employees, some 7 million of whom are currently outside the Social Security system. Perry has also praised the privatized system for public employees in Galveston and two other Texas counties, suggesting that he might be open to some type of private investment option. But "suggesting" is as far as he goes.</p> <p>On Medicare, Perry has been equally murky. At times, he has suggested that we should "transition away from" the current Medicare system, but without saying what we should transition to. His aides point out that Perry has only recently joined the race and hasn't had time to develop specific proposals. But given his fiery talk on the issues, until he does he will seem more hat than cattle.</p> <p>Rep. Michelle Bachmann has also largely tried to have it both ways on entitlement reform. She voted for the Ryan plan in Congress but promptly put out a statement distancing herself from it, claiming that her vote came with an asterisk. On Social Security, Bachmann once called the program a "monstrous fraud," but has now joined Romney in attacking Perry's "Ponzi scheme" description. She says that a key difference between her and Perry is that she believes Social Security "is an important safety net and that the federal government should keep its promise to seniors." But with Social Security currently facing more than $20 trillion in unfunded liabilities, the question is <em>how</em> it will keep that promise.</p> <p>Second-tier candidates, with less to lose, have been more willing to spell out their proposals. Businessman Herman Cain, for example, supports both the Ryan plan and Chilean-style personal accounts for Social Security. Former Pennsylvania senator Rick Santorum takes similar positions, as does former New Mexico governor Gary Johnson. Former Utah governor Jon Huntsman has endorsed the Ryan plan but has not spelled out his views on Social Security reform. Newt Gingrich, on the other hand, has focused on cutting "fraud, waste, and abuse," rather than fundamentally altering the structure of those programs. Ever the iconoclast, Rep. Ron Paul opposes both the Ryan plan and personal accounts for Social Security, since he opposes a federal role in either health care or retirement on principle.</p> <p>The facts are both simple and frightening. The unfunded liabilities of Social Security and Medicare run between $50 trillion and $110 trillion. Those two programs, along with Medicaid, are the primary drivers of our future indebtedness. In fact, by 2050, those three programs alone will consume 18.4 percent of GDP. If one assumes that revenues return to and stay at their traditional 18 percent of GDP, then those three programs alone will consume all federal revenues. There would not be a single dime available for any other program of government, from national defense to welfare.</p> <p>The Republican candidates all talk about reducing government spending. But they cannot do that unless they commit to real entitlement reform. There's time, and lots of debates, to hear specifics from them. But so far, the omens are not auspicious.</p> </div> Wed, 28 Sep 2011 00:00:00 -0400 Michael D. Tanner https://www.cato.org/publications/commentary/gop-needs-entitlement-plan The Social Security Rorschach Test https://www.cato.org/publications/commentary/social-security-rorschach-test?utm_source=rss_topic&utm_medium=rss&utm_campaign=rss William G. Shipman <div class="lead text-default"> <p>Comments by Rick Perry and Mitt Romney on Social Security during the last two Republican presidential debates may have provided more insight into these two men than expected — something to ponder with the next debate coming up.</p> </div> , <div class="text-default"> <p>Mr. Romney told us that he is "committed to saving Social Security" and that "under no circumstances would I ever say by any measure it's a failure."</p> <p>Mr. Perry called the system a "Ponzi scheme" and said it's "a monstrous lie" to tell young workers that their payroll taxes will provide them with Social Security benefits.</p> <p>Mr. Romney replied that Mr. Perry's position could disqualify him as the GOP nominee. Apparently, a line has been drawn.</p> <p>In his 2005 State of the Union Address, President Bush spent about 20 percent of his time talking about Social Security reform, specifically personal investment accounts. Democrats fought this idea with all their strength. Although it's less well known, Republicans engaged in a family brawl in which many fought Mr. Bush's investment-accounts idea, too. They were afraid that if they supported the president, they would lose their next elections.</p> <p>But now the brawl has broken through the Republican skin and is in the open. What can we learn from this?</p> <p>First, reflect upon Governor Romney's point that Social Security is not a failure "by any measure," and try to square that with the fact that Social Security is mandatory. Each worker is compelled to pay 10.6% of his wage, on up to $106,800, to the government for the retirement portion of the system. That means the average-wage earner has no choice on how to allocate 10.6% of his wage income for retirement. That's bad enough, but it's made worse by the fact that his Social Security benefits are very low: about half of what his Social Security taxes would provide if they were invested in a diversified portfolio of stocks and bonds.</p> <p>Second, in 1950, when there were 16 workers per beneficiary, the payroll tax rate was just 3% on $3,000 of wages. Since then the tax rate increased 18 times, and the wage subject to the tax increased 43 times. After adjusting for inflation the maximum tax jumped 1,322%. Benefits rose as well, but proportionally much less. The squeeze in benefits relative to taxes has progressively made the system a worse deal.</p> <p>Third, Social Security's actuaries estimate that the mismatch between future taxes and benefits is just under $7 trillion. That number represents what must be invested right now, in addition to all future payroll taxes, in order to pay scheduled benefits.</p> <p>Finally, in the 1960 <em>Flemming v. Nestor</em> case, the Supreme Court ruled that workers have no property rights to their scheduled benefits. The government can reduce them at will, which it did in 1983 by increasing the retirement age from 65 to 67; or it can increase the tax at will, which it consistently has done. Also, when one member of an elderly couple dies, the government — in most cases — reduces Social Security benefits by a third. Sort of a death tax.</p> <p>This system of no choice, low benefits relative to taxes, significant tax increases, a massive unfunded liability, the absence of personal property rights and a death tax apparently does not rise to the level of failure "by any measure" according to Gov. Romney.</p> <p>For his part, Gov. Perry has called Social Security a Ponzi scheme: a fraudulent investment operation that pays subscribers not from investment earnings but from new subscribers' funds. To entice subscribers, such schemes must provide unusually high and/or stable returns. Given that the high returns require endless new subscribers to pay off previous ones, such schemes ultimately fail.</p> <p>Although Mr. Perry's Ponzi analogy is not technically correct, it has some validity in that Social Security benefits are financed by ever more subscribers — that is, wage earners. But unlike a Ponzi scheme, Social Security is not fraudulent, and it doesn't pay large benefits relative to taxes. Indeed, it pays low benefits. A Ponzi scheme promises high returns. That's why people freely, although foolishly, play the game. Social Security promises low returns. That's why people are forced to play the game.</p> <p>Mr. Romney has stated that the Republican nominee must be committed to saving Social Security, not abolishing it. It's not clear what he means. Does he want to save the objective of Social Security, which is, broadly speaking, the provision of retirement benefits? Or does he want to save its structure wherein today's young finance benefits for today's old?</p> <p>Mr. Perry says the system is a Ponzi scheme and a lie. Does this mean that he wants to get rid of the structure yet keep the objective? Or does it mean that he wants to get rid of both?</p> <p>The two candidates' differences on this issue may shed light on bigger philosophical disagreements they may have. Do they see government as bungling but benign, only in need of a seasoned CEO who can more successfully manage the enterprise? Or do they see government as overreaching, stifling, oppressive and hurtful in its reach, and in need of a strong and principled leader to shove it out of the way?</p> <p>How these candidates deal with Social Security, the government's largest program, may shed light on who they really are.</p> </div> Wed, 21 Sep 2011 00:00:00 -0400 William G. Shipman https://www.cato.org/publications/commentary/social-security-rorschach-test Ed Crane's research on Social Security cited on The Rush Limbaugh Show https://www.cato.org/multimedia/radio-highlights/ed-cranes-research-social-security-cited-rush-limbaugh-show?utm_source=rss_topic&utm_medium=rss&utm_campaign=rss Mon, 12 Sep 2011 08:00:00 -0400 Edward H. Crane https://www.cato.org/multimedia/radio-highlights/ed-cranes-research-social-security-cited-rush-limbaugh-show