Cato Privatization

The 6.2 Percent Solution

Endorsement

In general we have doubts about the wisdom of privatization.  It changes the nature of Social Security from insurance to investment.  That said, this is probably the best pure-play privatization plan. We cannot however endorse this plan. First, it is out-of-date. The work pre-dates the financial crisis, trillions of dollars of debt, wage stagnation, and unemployment rates not seen since the Great Depression. Second, it uses general taxpayer subsidies to support the system – which we always reject.

How Does It Work?

The plan works by enabling people to invest the money better than Social Security can. It is possible.  The problem is that Social Security's outflow now exceeds payroll taxes.  So there is very little to invest.

Strengths

This plan is superior to other privatization plans in two ways. It concentrates is energy, putting 50% of payroll taxes into a private account. This is more cost efficient. The plan also avoids providing free-risk to people who want to leave Social Security.

Weaknesses

One has to question the merits of a plan when the authors leave it dormant for nearly a decade.As it stands, the economic assumptions are aggressive.  For example, the plan counts on real returns in stocks that have not be seen in 100 years.

The plan changes the nature of Social Security from insurance to investments.  These are very different things.  They tend to work together like bacon and eggs.  Replacing insurance with more investments is like replacing the eggs with sausage.

The plan puts more regulations on business, and these requirements may come with large scale legal recourse.

Distortions

The plan represents average investment returns as equivalent to individual returns in Social Security. “The poor rate of return in Social Security means that many young workers retirement benefits will be far lower than if they were able to invest their payroll taxes privately.” This is a blatant misstatement of fact. The returns in Social Security vary by many thing including wage.  For low-income workers who reach retirement, returns from Social Security would dwarf any legal investment.

Open Questions

What happens to private accounts if Social Security goes into crisis?

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