Privatizing Social Security

The Cato Institute is hoping to save Social Security through privatizing as President Bush has proposed, in general terms.

Social Security is the largest government program in the world and was enacted during our great depression in 1935. The basic proposition is that the federal government's direct involvement in this is to be reduced, in fiscal terms, by about one third. The Bush Administration usually refers to this as a 2% reduction, though this may be confusing as what this 2% refers to is 2% of the 6% tax on income below the taxable level, therefore it is more rightly described as one third (1/3) of the tax revenue source supporting the payouts.

My view of the administration's policy motivating goals is that in general they are laudable and righteous:

• to restore Social Security to long-term solvency
• to provide a higher return on investment benefit to tax payers
• to allow low-income workers to accumulate real inheritable wealth
• to give workers ownership and control of their retirement funds

The Democratic party is expecting to oppose this privatization effort for lots of very good reasons as well:

• Social Security is intended to be the safest part of the retirement portfolio, guaranteed by the full faith of the US Government.
• There are less drastic ways such to address the problem such as means-testing benefits, prolonging retirement age, or raising payroll taxes (eww!).
• It is a policy designed to reward the powerful few (wall street), rather than the productive many who are the payers into the system.
• It is an expensive method to address to the problem and poor governmental fiscal responsibility.

Can the policy goals be reconciled with the reasonable opposition, and if so how?

I am in what is perhaps a minority within my party who believe that such reconciliation is possible, however I do not expect much will be achieved within the current Presidential administration. Reconciliation will require intense good faith negotiation between all sides on this debate, and historically Social Security is not an issue that receives such treatment swiftly. It is the proverbial "third rail" in politics (touch it and die).

Therefore, I will credit President Bush with heroically raising the issue's priority and fostering the discussion of partial privatization, (which I believe will eventually be a part of the solution), but I do not expect the optional 1/3 privatization proposal to survive intact. The proposal is a significant change in the structure and may be overly drastic in the near term. Also it is questionable as to whether the proposed mechanism ultimately meets the goals of the policy. Something more moderate, please?

What I will look for from my Democratic colleagues is more than just opposition. I will look for the good faith negotiation that can only come when both sides are eager to resolve a problem. The method of resolution may change, but the problem will not go away on its own.

One other answer to this issue is in means testing the benefits. Those of us who have acquired wealth through our labors, in general have less need of the social security benefit, and also generally better health. We also tend to enjoy those labors that have brought us the wealth and so we often do not mind postponing our retirement a little more than most. In light of this, would we be able to increase the solvency of the SSTF by starting the payments at a later time in the lives of those with more means? The actuaries should be able to formulate a graduated means test based on income tax returns to reduce the benefit to the most wealthy by simply start the benefit later in our lives.

Starting the benefit later seems very appropriate to me. The more successful people tend to live longer (so we get more years of the fixed benefit anyway) and we need the benefit less. The risk is that the benefit will acquire some social stigma damaging to the pride of our deserving older people. I see this risk as minor given this structure. There is value in keeping social security from becoming too much a wealth reapportionment scheme as the whole program will lose some support if that occurs.

Another method of resolution favored by Bill Clinton is increasing immigration for foreign workers as well as increasing the minimum wage. This increases the taxable wage base and evens out our population growth bubble. I can not find a significant downside to this. Unemployment is low already and has been for years, it would increase our productivity and our GDP as well as the tax base of workers supporting the retired. It also capitalizes on our increased border security of late, especially since 9/11.

Whatever we end up with will likely be a combination of balanced adjustments to our current social security/employment/benefit/taxation model. There is still too much socialism world wide (and too much poverty domestically) for us to be able to successfully carve out the program and maintain our immigration, so some compromise is a necessity. I hope our elected officials can come to reasonable terms.