Privatization is the only way to save Social Security

There is much talk about reforming Social Security. As college students, we should be scared. We face the prospect of paying taxes far in excess of current levels into a system that may not exist when we retire. While that does not have to be the case, Clinton’s proposal in the State of the Union address to use excess revenue to save Social Security fails to scratch the surface of the necessary changes. The only thing that can keep the system solvent is privatization.

The first thing that must be understood is that the Social Security “trust fund” cannot be shored up with excess government revenue because the trust fund does not exist. Social Security is a pay-as-you-go system. Taxes collected from workers are immediately paid out to recipients. Any money leftover is lent to the rest of the federal government, and in return, the trust fund receives IOUs from the treasury.

Unfortunately, these IOUs have absolutely no value. When payouts begin to exceed taxes in approximately 2013, the Social Security system must ask the treasury to redeem its IOUs. The treasury can get the money through tax revenues or borrowing.

In the State of the Union, Clinton proposed to use a portion of the excess revenues to pay off part of the national debt. The logic is that if the government has less outstanding debt, it will be easier to borrow from the private sector down the road.

Unfortunately, there is no reason to believe that the benefits reaped from this will be used to save Social Security. Congress could just as easily borrow money for new spending programs, there could be a war, or most likely, the extraordinarily rosy budget projections currently being used (which are the basis for Clinton’s plan) will simply not hold.

The only way to make Social Security solvent over the long term is some form of privatization. What we need to do is move from a pay-as-you-go system to a wealth-based system under which individuals contribute to individual accounts under their control.

This would accomplish two important goals. First, it would increase the rate of return on each worker’s contribution. Today, the average return on Social Security is 2.2 percent – in 20 years, it will be negative. Compare this to the nine percent average return historically achieved by funds investing in stocks and bonds.

Second, it would reduce payroll taxes. Given the higher rate of return on private retirement account contributions, benefits equivalent to those provided today could be financed with a payroll tax one-fifth the size of the current one.

It is time for serious reform. Although many people are concerned about the uncertainty of switching to a private system, Chile, the United Kingdom and Sweden all have enacted similar reforms with great success. Few of us should want to be forced into a failing system – and there is no reason for that to happen. Privatization is a viable and tested alternative.

The writer is president of the GW College Libertarians.

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