A Plan for Privatizing Social Security

April 30, 1997 • Social Security Choice Paper No. 8

As Social Security’s problems become more apparent, there is growing support for the concept of privatizing the retirement program. As the debate grows it becomes more important to move beyond generalizations and provide detailed proposals for how such privatization can be accomplished. Without endorsing any specific proposal, the Cato Project on Social Security Privatization will present a number of possible privatization scenarios.

In this study, Peter Ferrara offers a proposal based on the following key elements:

  • Current workers could be free to choose either the private option or Social Security. For those who choose the private plan, workers and employers will each pay 5 percent of wages, instead of the current Social Security payroll tax of 6.2 percent for each, into private investment accounts, resulting in an eventual payroll tax cut of 20 percent. Besides supporting retirement benefits, the accounts would finance private life and disability insurance, thus replacing Social Security survivors and disability benefits.
  • Workers who opt out of the current Social Security system would receive recognition bonds from the federal government that would pay them a proportion of future Social Security benefits equal to the proportion of lifetime taxes they had already paid.
  • Benefits promised to current retirees would be paid in full, with no reduction of any kind.

The biggest objection to privatizing Social Security has been the transition to a privatized system. But the projections of the fiscal impact of the plan offered in this study show that the transition can be financed without new taxes and without cutting benefits for today’s recipients.

Indeed, the yearly transition deficit would be offset after about 14 years. After that, the privatization reform actually starts producing a surplus for the federal government. About 20 years after the reform is begun, that surplus would be large enough in 1996 dollars to eliminate completely a federal deficit as large as today’s.

These projections place the transition in a whole new perspective. They show that the transition is financially feasible and manageable, and that modest short‐​term sacrifices would lead to long‐​term surpluses that would ultimately reduce the federal budget deficit.

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