Among the issues discussed are the problems of the current system; proposals for the reform; and the impact of reform on the poor, women, and minorities.

SOCIAL SECURITY and Its Discontents

Perspectives on CHOICE

CATO INSTITUTE

Copyright © 2004 Cato Institute
All right reserved.
ISBN: 978-1-930865-55-6

Contents

Acknowledgments........................................................................................................................................viiIntroduction Michael Tanner...........................................................................................................................1Part I: The Crisis1. Reengineering Social Security for the 21st Century Thomas F. Siems................................................................................132. The Trust Fund, the Surplus, and the Real Social Security Problem June O'Neill....................................................................373. "Saving" Social Security Is Not Enough Michael Tanner.............................................................................................534. Property Rights: The Hidden Issue of Social Security Reform Charles E. Rounds Jr..................................................................695. Private Investment of Social Security: The $10 Trillion Opportunity Martin Feldstein..............................................................816. The Moral Case for a Market-Based Retirement System Daniel Shapiro................................................................................89Part II: Women, the Poor, and Minorities7. Social Security Choices for the 21st-Century Woman Leanne Abdnor..................................................................................1118. The Impact of Social Security Reform on Low-Income Workers Jagadeesh Gokhale......................................................................1339. Disparate Impact: Social Security and African Americans Michael Tanner............................................................................147Part III: Solving the Problem10. No Second Best: The Unappetizing Alternatives to Individual Accounts Michael Tanner...............................................................16511. Empowering Workers: The Privatization of Social Security in Chile Jos Piera.....................................................................18912. Perspectives on the President's Commission to Strengthen Social Security Andrew G. Biggs..........................................................20113. The 6.2 Percent Solution: A Plan for Reforming Social Security Michael Tanner.....................................................................281Part IV: The Tough Questions14. Speaking the Truth about Social Security Reform Milton Friedman...................................................................................30915. Administration Costs and the Relative Efficiency of Public and Private Social Security Systems Robert Genetski....................................31316. Personal Accounts in a Down Market: How Recent Stock Market Declines Affect the Social Security Reform Debate Andrew G. Biggs.....................333Part V: The Public17. Public Opinion and Private Accounts: Measuring Risk and Confidence in Rethinking Social Security John Zogby.......................................357Contributors...........................................................................................................................................371Index..................................................................................................................................................373

Chapter One

Reengineering Social Security for the 21st Century

Thomas F. Siems

One of our nation's most challenging public policy debates concerns Social Security reform. The program is in crisis and in need of reform as a result of maturation of the current pay-as-you-go (PAYGO) Social Security system coupled with an aging American population.

People who have participated in Social Security since its inception have received much higher average annual real rates of return on their contributions than have later participants. This is due, in part, to the basic design of the PAYGO program under which earlier participants received windfall gains as the necessary result of moving from the start-up phase to a mature phase, while later participants receive below-market returns. In contrast, real financial market returns increased over this time frame, widening the gap between market returns and Social Security returns.

With demographic changes, including the retirement of the baby-boom generation and increased life expectancy, looming on the horizon, action must soon be taken to ensure Social Security's future. Social Security gradually expanded from its inception through the early 1980s by increasing benefits and coverage for various groups. To pay for those modifications, payroll tax rates and the maximum earnings ceiling have been steadily raised. Now the Social Security trust funds are in long-term financial imbalance, and benefit cuts and more payroll tax rate increases seem inevitable if Americans are to retain the important social protections that Social Security currently offers.

Now is the time to consider more dramatic changes, including various proposals that allow for prefunding through individual accounts. Several researchers have put forth proposals that aim to (1) give individuals greater choice among retirement options, (2) provide greater incentives for Americans to work and to save to bolster their economic security, (3) restore Social Security's solvency, and (4) preserve at least some of the current program's social protections. Although there will certainly be some transition costs in moving to a new system, continued delays in addressing Social Security's long-run financing needs will more than likely require even greater and costlier changes in the future.

The Rise of Social Security: Demographic Uncertainties

Like many industrialized countries, the United States has instituted programs to help individuals face the uncertainties brought on by disability and old age. The structure of these programs was initially shaped by important social, economic, and demographic changes that rendered traditional systems of economic security increasingly unworkable. To fully understand the reasons why the programs were structured as they were, let's review the circumstances and changes that led to their adoption.

The social insurance program in the United States, known as Social Security, was signed into law by President Franklin D. Roosevelt on August 14, 1935, and was designed primarily to pay eligible individuals aged 65 or older a continuing income after retirement. Three important social, demographic, and economic changes provided impetus for this legislation: (1) the Industrial Revolution, (2) increased life expectancies, and (3) the Great Depression.

As the American economy shifted from an agricultural to an industrial base during the last two decades of the 1800s and the early 1900s, the Industrial Revolution transformed the way people worked, where they worked, and with whom they worked. In the agricultural economy, most individuals were self-employed. People willing to work could generally provide at least a bare subsistence for themselves and their families. But, in the industrial economy, many individuals became wage earners who worked for industrial corporations. As a result of that transformation, factors outside individuals' control (e.g., recessions, business closures, and layoffs) threatened their economic security to a greater extent than before.

The Industrial Revolution also moved...