Feature
The Road From Serfdom
Let workers choose: the New Deal, or a better deal?
(Page 2 of 2)
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?
About the Author
Stephen Moore is a member of the Wall Street Journal editorial board.
About the Author
Peter Ferrara is Director of Entitlement and Budget Policy at the Heartland Institute, General Counsel of the American Civil Rights Union, Senior Fellow at the National Center for Policy Analysis, and Senior Policy Advisor on Entitlements and Budget Policy at the National Tax Limitation Foundation. He served in the White House Office of Policy Development under President Reagan, and as Associate Deputy Attorney General of the United States under President George H.W. Bush.
Letter to the Editor View all comments (10) | Leave a comment
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Mike Stein| 4.26.12 @ 5:57PM
Unfortunately there is a transition problem you haven't addressed. Since SS pays current retirees out of the the contributions of current workers, all the money going into private savings plans will no longer be available to pay those already retired, as well as those who are so close to retirement that they must be excluded from the plan (or would opt for the old system voluntarily) because they won't have enough working years left to accumulate an adequate private nest egg.
You write, "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." But what about 20 years, or 10 years? What age would you set as your dividing line between people who _must_ go to the new plan, and people who may opt to stay under the old plan? The younger you set it, the less likely it is that a downturn will leave private account owners destitute - but the more retirees there will be who will expect traditional SS benefits after the SS tax stream has been cut off. Where does the money come to fund those benefits, since it's no longer coming from the SS payroll tax? I don't see how it's useful to eliminate the SS deficit by making a huge addition to the already large deficit in the non-SS budget.
Jacobite| 4.26.12 @ 8:00PM
The beeg mah-moo of Conservatism, Ronald Reagan, abolished exactly zero government programs or organizations. His administration was notable only for doing less damage than other administrations (GOP or Dem). And now someone thinks we are going to elect people who will do much, much more than Reagan? We can say there is no majority among current GOP officeholders to make any serious cuts in the entitlement programs that will sink the economy. And economics is only a secondary issue, as the Founders repeatedly said. The people's virtue is what held the Republic together. Know any Republicans out to fight the degenerates in our society? In Thomas Jefferson's Virginia, both blasphemy and sodomy were Common-Law crimes, possibly capital crimes. That's what they were talkin' about.
buckeyeman| 4.27.12 @ 12:11PM
Steve and Peter, I luv ya both, but I can't follow the reasoning in this lengthy article. We already have two alternate pathways to funding our own retirement. The first is to simply save our own money. Sure, its after tax money, but we can still save it instead of blowing it on lottery tickets, cigarettes, trips to Vegas, etc. The second alternate is the plethora of individual retirement accounts. Sure, they're complex, but not so much so that most people can't do them.
The real problem is redistribution of wealth, so why don't you just come out and say so. The idea that "we can run your socialist programs better than you socialists can" gets us into trouble all the time. Like most other "establishment" guys, you always seem to accept the premise that stealing my money to pay for something that somebody else wants is the proper role of the government.
You just can't tweak these programs, the numbers and human psychology just don't work. It never works. You two are smart enough to know this, so why did you write this article?
PattyMor| 4.27.12 @ 3:39PM
How are we going to get there with candidates like Romneycare Romney and the outright marxist, Barack Obama? I don't see either as reformers, but Romney will be the very best manager of the welfare state.
gigi0102 | 4.28.12 @ 8:28AM
For the last 20 years I've supported various versions of the private retirement accounts. Now I'm very near retirement and still stuck with Social Security -- a 15% tax, by the way, for the self-employed.
The private accounts are much better than the USA's ponzi scheme. Social "Security," actually is not at all secure -- eventually you run out of other peoples' money. We're just about there right now.
fiscal| 5.1.12 @ 6:42PM
When will you neocons start using data and analysis rather than ideology to come to appropriate conclusions. As has been noted earlier, your plan is nearly impossible to implement because Social Security is simply not funded -- it is paid for by younger workers. In addition, the law of unintended consequences will ensue as those with high incomes opt out of Social Security (because eventually there will be means testing) and the young will invest poorly (they always do) thereby putting an even larger strain on Social Security. Ideologically, I agree with your direction, but unfortunately, it has no chance of working because the numbers just don't add up.
In addition, you assume that future market growth will be the same as the past -- i.e., 7-8% per year. I believe that is a faulty assumption as past growth was fueled by a growing middle class and with increasing business productivity, the middle class is declining. So with the wealthy putting less into Social Security, the young investing in high risk and high failure markets which won't pay out for most of them, and the market not growing like the dotcom and housing markets (where most people previously increased their wealth -- but no more), you are going to cause an even greater failure.
A better alternative would be simply starting by means testing and raising the retirement age by a few years. Then over a period of 30 years or so, allow an increasing amount of social security funds to be self-directed -- sort of like a Medicare advantage plan for Social Security.
By the way, the average amount of Social Security collected by retirees in 2012 is just under $15,000 per year -- so it isn't even a good retirement plan right now. And your statement about SS funds not being available after one dies makes no sense because that is how insurance works. If those funds were available to someone's estate, the current "insurance rate" would have to be much higher than 15%. SS was never designed as an investment program -- it was always an insurance program. When you buy term life insurance you don't get your premiums back. If you want to buy whole life, where you do get your premiums back, it costs many times more for the same coverage. I can't believe two financial wizards like you don't understand the difference between insurance and investment.
And there is no chance any vote that has a chance of passing will ever come up on this issue because the senior vote is extremely important to Republicans to get re-elected -- much more important than to Democrats. That's why we need term limits for anything of value in solving the entitlements issue to get passed.
Donald Young's Revenge| 5.1.12 @ 9:48PM
Hey Stephen, Will there be anyone from the Wall Street Journal heading down to Phoenix, AZ anytime soon to cover the Sheriff Joe Arpaio criminal investigation. They have taken this investigation from "probable cause" to a "criminal" investigation. It is now in the 8th month and they are now convinced that Obama has been flaunting a forged birth certificate and a forged Selective Service card. The later carries a $250,000 fine and a 5 year prison sentence. There is more coming in the SECOND Press Conference, you guys missed the FIRST Press Conference (Why?) . This is the biggest scandal in the history of our country with tremendous ramifications and the Wall Street Journal misses the story completely. What they hell happened, you guys must be sleeping on the job.
POST American| 5.2.12 @ 3:38AM
---Deals imply a dealer and further
imply a casino which is a closed, and nearly
ALWAYS iself a 'fixed' system.
NO --NO ---NO!
Time to shed the Old Adam of the USURY
and EUGENICS money system and its
'fave' instrument of creep op CON--troll,
the 'benny violent' Social Darwinist
TAX FREE, unaccountable and undeniably
PSYCHOPATHIC capstone foundations.
------------THERE IS NO OTHER WAY--------------
---------------HUAC/ Nuremberg 2012----------------
Marc Jeric| 5.6.12 @ 1:09PM
If I had been free to invest my SS contributions plus what the company paid for me instead of giving me in salary, plus if i had not been forced to pay income taxes on my SS contributions, after 35 years of work I would have a capital of some $2.5 million to live on. Instead I get $1,400 a month.
Roy| 5.7.12 @ 7:55PM
For SS, this might work, but it can't for Medicare, can it?
It's ALWAYS going to be a better option for me to have the federal government pay all my bills with no questions asked than any other option. The ones that is bad for are the ones paying the bills.