Retiring with Dignity: Social Security vs. Private Markets

August 14, 1995 • Social Security Choice Paper No. 2

Retiring with financial dignity is in jeopardy. That is the direct result of Social Security’s ever‐​expanding role in the economics of both retirees and workers. Compassionate in intent, but flawed in design, Social Security will prevent many from enjoying financial security in their later years.

Unlike personal savings, pensions, and independent retirement accounts, all of which are stores of wealth, Social Security is a misguided political construct, wherein one’s retirement benefits are dependent on the willingness of future workers to be taxed.

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

Beyond that, the unsound financial foundation of the system virtually ensures that the promised benefits, low as they are, will be reduced even further. In the past, when Social Security’s financial precariousness was addressed, the legislative response was to increase taxes and reduce benefits. Such responses not only failed to solve the problem, they exacerbated it.

There is a better solution. Allow people the freedom to invest their Federal Insurance Contributions Act (FICA) taxes in financial assets such as stocks and bonds. History shows that the financial return on those instruments meets retirement needs at a fraction of Social Security’s cost.

For example, assuming historical rates of return, if individuals born in 1970 were allowed to invest in stocks the amount they currently pay in Social Security taxes, those individuals could receive nearly six times the benefits that they are scheduled to receive under Social Security, as much as $11,729 per month. Even a low‐​wage earner would receive nearly three times the return on Social Security.

The idea of privatizing a public pension system is neither new nor untried. Where it has been properly implemented, it has been remarkably successful. For governments, privatization is the only viable answer to Social Security’s inherent problems; for individuals, it is a profitable one.

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