Let workers choose: the New Deal, or a better deal?
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Personal accounts aren’t just a theory, either. About 30 years ago, workers in Chile won just such freedom for their pension contributions. In the first month, 25 percent of workers chose to switch to the new personal account system. After 18 months, 93 percent of workers had switched. Within a few years, annual economic growth soared to 7 percent, double the country’s historic rate, while unemployment fell to 5 percent. After 20 years, the enormous savings in the personal accounts totaled 70 percent of GDP. Today, workers pay into the personal accounts half the taxes required under the old system, yet they earn twice the benefits. Chile’s reform has been recognized as such a success, that seven other nations in Latin America have adopted similar plans. Other such reforms have now flowered in Great Britain, Australia, Hungary, and Poland.
But we don’t have to travel the world to find models for personal accounts. In 1981, local government workers in and around Galveston, Texas, voted to opt out of Social Security and into a private savings and investment plan. The Thrift Savings Plan for federal employees has also been popular and successful.
In 2005, Congressman Paul Ryan (R-WI) and Senator John Sununu (R-NH) introduced comprehensive model legislation to provide a personal account option for each American. The chief actuary of Social Security officially scored this legislation as achieving full solvency for the program, completely eliminating its deficits over time without any benefit cuts or tax hikes. In fact, the chief actuary recognized that future retirees with personal accounts would earn higher benefits than under Social Security. He concluded that 100 percent of American workers would choose the personal accounts.
It’s true that George W. Bush fought to reform Social Security in just such a manner, and was blown out of the water politically. But that Bush plan was poorly formulated and executed. Further, one of the talking points that sunk his proposal—the idea that stock market volatility makes personal accounts unsafe—has now been contradicted by real-world evidence. The 2008 financial meltdown was about the worst imaginable scenario for those worried about market volatility. But workers who retired in its immediate aftermath still would have done much better with personal portfolios than with Social Security. Even with the stock market crash, workers of all income levels and all races would have gained financially from private accounts and 40 years of compound interest, according to a study by Michael Tanner of the Cato Institute.
Of course, that doesn’t mean the left will oppose this plan with any less ferocity. After all, what we propose is a frontal assault against the modern-day entitlement system. Retired Americans would no longer be wards of the state, waiting eagerly for their checks each month, but would be instead financially self-sufficient. The political hurdle is to convince seniors and those near retirement that their benefits will not be cut, and that reform will offer young workers a better deal and keep the retirement system solvent for generations. We suspect that over time, most workers would freely choose to own their retirement income and remove it from the clutches of government control. What better way to break the back of the modern welfare state?
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