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Privatization of Social Security: The Transition Issue

Published online by Cambridge University Press:  13 January 2009

Peter J. Ferrara
Peter J. Ferrara
Affiliation:
Economics, Americans for Tax Reform
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Extract

The possible privatization of Social Security has long been a matter of theoretical interest to those who ideologically favor free markets and maximum personal autonomy. But in the spirit of an age when the Berlin Wall fell and the totalitarian Soviet empire collapsed through a peaceful revolution from within, the politics of Social Security has been remade in recent years in a similarly dramatic fashion.

Type
Research Article
Information
Social Philosophy and Policy , Volume 14 , Issue 2 , Summer 1997 , pp. 145 - 164
Copyright
Copyright © Social Philosophy and Policy Foundation 1997

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References

1 A 1994 poll by Luntz Research found that 82 percent of adults under thirty-five supported the idea of “directing part of [their] Social Security taxes to a personal retirement account like an IRA which could be kept at any financial institution they would like, and receiving less in Social Security benefits from the government.” A 1995 Luntz poll of all adults found the public supporting such an option by 77 percent to 14 percent. In 1996, McInturff and Associates conducted a nationwide poll for the Cato Institute which found the public supporting the idea by 68 percent to 11 percent. These poll results are reviewed in Ferrara, Peter J., A Plan for Privatizing Social Security (Washington, DC: Cato Institute, 1997).Google Scholar

2 Ferrara, Peter J., Goodman, John C., and Matthews, Merrill Jr., Private Alternatives to Social Security in Other Countries, NCPA Study No. 200 (Dallas: National Center for Policy Analysis, 1995)Google Scholar; World Bank Policy Research Report, Averting the Old Age Crisis (New York: Oxford University Press, 1994).Google Scholar

3 See Ferrara, , A Plan for Privatizing Social SecurityGoogle Scholar; and Ferrara, Peter J., “The New Politics of Social Security,” Wall Street Journal, 03 8, 1996, p. A19.Google Scholar

4 These include Ferrara, Peter J., Social Security: The Inherent Contradiction (Washington, DC: Cato Institute, 1980)Google Scholar; Ferrara, Peter J., ed., Social Security: Prospects for Real Reform (Washington, DC: Cato Institute, 1985)Google Scholar; Ferrara, Peter J., Social Security Rates of Return for Today's Young Workers (Washington, DC: National Chamber Foundation, 1986).Google Scholar

5 Board of Trustees of the Federal Old-Age and Survivors' Insurance and Disability Insurance Trust Funds, 1996 Annual Report (Washington, DC, 1996)Google Scholar. For a thorough discussion of the basis of this long-term financing crisis, see Ferrara, , Social Security: The Inherent Contradiction, chs. 2 and 5Google Scholar; and Weinberger, Mark, Social Security: Facing the Facts, Cato Institute Social Security Paper No. 3 (Washington, DC: Cato Institute, 1996).Google Scholar

6 Ferrara, , Social Security Rates of Return for Today's Young WorkersGoogle Scholar; Shipman, William G., Retiring with Dignity: Social Security v. Private Markets, Cato Institute Social Security Paper No. 2 (Washington, DC: Cato Institute, 1995)Google Scholar. For a thorough discussion of the basis of this problem, see Ferrara, , Social Security: The Inherent Contradiction, chs. 2 and 4.Google Scholar

7 Martin Feldstein estimates that as a result of this effect, Social Security reduces national savings by 30 to 40 percent; see Feldstein, Martin, “Social Security, Induced Retirement, and Aggregate Capital Accumulation,” Journal of Political Economy, vol. 82, no. 5 (09–10 1974)Google Scholar; and Feldstein, Martin and Pellechio, Anthony, “Social Security Wealth: The Impact of Alternative Inflation Adjustments,” Conference on Financing Social Security, American Enterprise Institute (Washington, DC, 1977)Google Scholar. For a thorough discussion of this issue, see Ferrara, , Social Security: The Inherent Contradiction, ch. 3.Google Scholar

8 Ferrara, Peter J. and Goodman, John C., Social Security and Race, NCPA Policy Report No. 128 (Washington, DC: National Center for Policy Analysis, 1987).Google Scholar

9 Ferrara, , Social Security Rates of Return for Today's Young Workers.Google Scholar

10 For a more thorough discussion of these issues, see Ferrara, , Social Security: The Inherent Contradiction, ch. 6.Google Scholar

11 I set out the full proposal in A Plan for Privatizing Social Security (supra note 1).

12 These rules allow broad investment choice among stocks, bonds, and other market vehicles, including foreign issues, but preclude the most risky, highly leveraged instruments, or non-interest-bearing commodities, such as gold.

13 Ferrara, , Social Security Rates of Return for Today's Young Workers, p. 15.Google Scholar

14 Feldstein, Martin, “The Missing Piece in Policy Analysis: Social Security Reform,” American Economic Review, vol. 86 (05 1996).Google Scholar

15 Social Security Board of Trustees, 1996 Annual Report, table III.B.4.Google Scholar

16 Congressional Budget Office, The Economic and Budget Outlook: Fiscal Years 1997–2006 (Washington, DC: U.S. Government Printing Office, 05 1996), table 4–3, p. 77.Google Scholar

17 Ferrara, , Social Security Rates of Return for Today's Young Workers.Google Scholar

18 The Social Security benefits owed to the previous working generation at the time of the reform would be somewhat less than the amount calculated here, which was the future benefits to be paid to the current working generation at the time of the reform. Due to wage growth over time, the Social Security benefits for the current working generation would be higher than those for the previous working generation. Consequently, paying for the previous generation's benefits out of the investment returns of the initial working generation at the time of the reform would reduce the total value of those accumulated investments and returns by less than the 10 percent calculated above.

19 Feldstein, Martin, “Social Security and the Distribution of Wealth,” Journal of the American Statistical Association, 11 1976.CrossRefGoogle Scholar

20 Beard, Sam, Restoring Hope in America: The Social Security Solution (San Francisco: Institute for Contemporary Studies, 1996).Google Scholar