Privatization of SS: The Fundamentals

[Richard Arnold <keycon@mindspring.com>]

A privatized SS system should not be mandatory. The fraction of a
person's income that is reasonable for him or her to set aside for
retirement depends on that person's circumstances and values. It
makes no more sense to specify a minimum fraction for all people
than to mandate a minimum fraction of income that must be spent on
housing or transportation. We must make the general presumption
that individuals can best judge for themsleves how to use their
resources.

Social Security has become less and less attractive as the number
of current recipients has grown relative to the number of workers
paying taxes, an imbalance that will only get bigger. This explains
the growing support for individual investment accounts. Younger
workers, in particular, are skeptical that they will get anything
close to their money's worth for SS taxes that they and their
employers pay. They believe they would do much better if they could
invest the money in their own 401(k) or equivalent.

The present discounted value of the promises embedded in the SS
law greatly exceeds the present discounted value of the expected
proceeds from the payroll tax. The difference is an unfunded
liability variously estimated at from $4 trillion to $11 trillion
- or from slightly larger than the funded federal debt that is in
the hands of the public to three times as large. For perspective,
the market value of ALL domestic corporations in the United States
at the end of 1997 was roughly $13 trillion.

There is no justification in requiring 100 percent of the people
to adopt a government-prescribed straitjacket to avoid encouraging
a few lower-income individuals to make no provisions for their old
age deliberately, knowing that they would receive the means-tested
amount. In a voluntary system, many fewer elderly people would
qualify for the means-tested amount from imprudence or deliberation
than from misfortune.

The SS payroll tax is a bad tax: a regressive tax on productive
activity. It should long since have been repealed. Privatizing SS
would be a good occasion to do so. However, the tyranny of the
status quo, and the vested interests that have been created, are
too strong and I have no illusions about the political feasibility
of moving to a voluntary system - but I have hope.

Richard Arnold