From the comments I received in Part 2 of “Social Security or Calamity?”, I am confident that full-privatization is not a viable solution for Social Security reform in America. It seems, as Greenspan recently put it, that we can no longer trust the managers in a free market to operate in the best interest of their stakeholders. We know that it is bad business to neglect the stakeholders of an organization, so where does the motivation come from to make selfish, short sighted decisions? Let’s get back to the subject at hand here. In this post I’ll introduce the idea of partial privatization as a reform option.
Partial Privatization
A hybrid of the highly privatized system Milton Friedman envisioned, and one that encompasses the inefficiencies of today’s system and ensures government control, is partial privatization. President George W. Bush established the Commission to Strengthen Social Security (CSSS) in 2001 to evaluate and propose plans for Social Security reform. In 2005, after the State of the Union Address, Bush suggested Model 2 of the CSSS report to be considered and debated by Congress for enactment.
Model 2 of the CSSS report proposes that 4% of taxes, up to a maximum of $1,000.00 be diverted from FICA to individual private investment accounts. Beginning in 2009 growth in benefits under the current system would be indexed to growth in price rather than wage; on average wage exceeds the price level. The new “progressive indexing” would reduce the growth in benefit payments to current recipients, but other measures in the report are proposed that reduce this loss. By 2052, new retirees would expect to earn 59% greater returns on benefits than the current system provides.
Cartoon: Taylor Jones | Hoover Digest
Opponents to Bush’s proposal argue that the net effects of the reform are neutral; due to the high cost of implementing new government bureaucracies to manage private accounts and the diversion of taxes from the current system to fund private investments. The details of Bush’s proposal are undisclosed and proper analysis is not available to determine its effects on the economy.
In “The Coming Generational Storm,” Kotlikoff and Burns present their analysis of the current welfare programs in America, and develop a detailed solution to the problems of Social Security through a form of partial privatization, which differs from Bush’s Model 2.
Kotlikoff and Burns propose a highly detailed and drastic reform to the tax and welfare programs of America; which they conclude is the best reform possible. First, they propose to replace the personal and corporate income tax, payroll tax, and gift and estate tax with a 33% federal retail sales tax plus rebate. The rebate would be paid monthly to households based on their demographic composition, allowing poverty stricken households to effectively pay no sales tax. Their analysis shows that this new tax would provide the government with enough revenue to cover their current spending needs, including the transition cost to their “New New Deal.” The 33% sales tax they propose represents 21% of the GDP in 2000.
Second, Social Security is replaced with a Personal Security System (PSS). Under this proposal, current retirees would receive their full benefits, and current workers would receive benefits based on their covered wages prior to the date of reform. The PSS accounts would function like PRA’s, but the Social Security Administration would have control over the investments in a global index fund of stocks, bonds, and real estate securities. The passive fund would have low management fees, which helps smooth opponent concerns about high management costs that trigger the conflict of interest with Wall Street. The return at retirement, based on the performance of the global fund, would be equal among all participants and the government would guarantee that contributors would get the money they invested adjusted for inflation, no matter what happens with the real value of the global fund due to price movements. Finally, their proposal abandons Medicare and Medicaid, replacing them with a universal Medical Security System that promotes private health care competition and a voucher system to subsidize the costs to citizens.
Stay tuned for the finale of this exciting adventure into Social Security reform; an adventure that all Americans need to think about taking…
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