Michigan to Washington: Privatize Social Security or Let Us Opt Out!

Thanks in part to President Clinton, who has called for "a national conversation" on Social Security reform, Americans may soon embrace the most sweeping changes to our retirement system since 1935—the year Social Security was enacted. No question about it: something must be done soon to avoid a financial crisis and fortunately, there’s a new willingness to explore options that previously were politically untouchable.

In just fifteen years, Social Security will start running deficits as baby boomers retire in large numbers and benefits begin to outstrip revenues. Lest anyone think that there are billions of dollars waiting in a trust fund for the system to tap, forget it. The Social Security Trust Fund consists of four brown file folders in Parkersburg, West Virginia, containing receipts for $650 billion in U. S. Treasury bonds. The trust fund has been spent. It is nothing more than an accounting gimmick and redeeming the bonds to pay benefits after 2012 will require a huge tax increase on young workers.

Social Security has probably reached the end of the line as far as the public’s tolerance of further payroll tax hikes is concerned. An Associated Press poll taken in March found nearly 76 percent of all Americans opposed to raising taxes to fund the system. And nearly 90 percent of younger workers—those between ages 18 and 34—want to shift at least some of their Social Security tax payments into private investment accounts.

One thing that Michigan can do to hasten meaningful reform is to join hands with the state of Oregon. One year ago, a majority of both houses of its legislature made Oregon the first state to petition Congress to establish a waiver system for states to design and implement alternatives to Social Security for all residents. Governor Engler should call upon the Michigan legislature to do the same.

The idea of "opting out" is very reasonable and has actually been accomplished with great success. Paul Farago, a senior advisor to the Oregon-based Cascade Policy Institute and an architect of the opt-out concept, notes that the original Social Security act allowed municipal governments to go on their own. As recently as 1981, employees of Galveston County, Texas, voted by a margin of 78 percent to 22 percent to leave the federal program for a private alternative. Two other nearby counties soon followed. Congress closed the loophole in 1983 but today, Farago points out, the thousands of workers in those Texas counties who opted into the private plan pay about the same in contributions but are getting several times the return compared to Social Security.

If Michigan were to make a bold statement by following Oregon’s lead, it might add to the pressure for Congress to take the correct course for all Americans. That correct course is not to raise taxes and not to put benefits off by raising the retirement age further, but to put individual citizens in charge of their golden years. In other words, end Social Security as we know it and privatize it.

Partial or total privatization of retirement systems is a trend that is sweeping the world. Chile was the first country in this hemisphere to adopt a national, government-sponsored social security program (in 1924) and the first in the world (in 1981) to end it by substituting a privately funded and administered plan. Chilean workers have earned an astounding, average annual rate of return, after inflation, of 12 percent during the past 15 years. Great Britain and Australia have joined the privatization bandwagon, as have Argentina, Peru, Hungary, Romania, Croatia, and even Russia and several other nations. If they can do it, why can’t America?

How risky would it be for American citizens to invest their own retirement savings in the stock market? An analysis of the historical performance of stocks from the prestigious Wharton School in Pennsylvania shows that while there certainly have been single-year periods and even five-year periods in which the stock market averaged a negative return, the longer the period stocks are held, the less the risk. Never in American history did stocks produce a loss—in real terms—over a twenty-year period. The very best return on stocks in any twenty-year period was 12.6 percent and the very worst return was, at one percent, still much better than today’s younger workers can expect from the Social Security system!

When Social Security was first enacted, there were 30 Americans paying in for every one beneficiary. Today, that ratio is just three to one and in barely another generation, there will be just two payers for every recipient. This intergenerational Ponzi scheme will collapse before then in an actuarial nightmare, harming all Americans, unless Congress acts soon to return control of retirement decisions to citizens instead of politicians.

Michigan can help the nation get this job done right if it sends a message to Washington now: Either privatize Social Security or let our people go!