January 20, 2005

The Point Is Ownership

by Michael Tanner

Michael Tanner is director of the Project on Social Security Choice at the Cato Institute and author of Social Security and Its Discontents.

As the debate over Social Security reform unfolds, there will be much discussion about Social Security's looming financial crisis, with good cause. The national retirement program will begin running a deficit in less than 15 years -- spending more on benefits than it takes in through taxes.

The IOUs in the Social Security Trust Fund are not real assets that can be used to pay benefits, but merely claims against future taxes. Overall, Social security faces unfunded liabilities of nearly $12 trillion.

However, all the focus on the Social Security's finances may be missing an important point. After all, if the only thing one cares about is keeping Social Security solvent, this could be accomplished by raising taxes or cutting benefits, no matter how bad a deal this would make the program for younger workers.

While solvency is important, the goal of Social Security reform should be more than to just balance the books. We should be trying to provide workers with the best possible retirement options, and this involves giving them more control and ownership of their retirement funds.

Under the current dispensation, once a worker pays his or her Social Security taxes into the system, the worker no longer owns that money. This is a very paternalistic arrangement, in which the daddy government doesn't trust the kids to control their own money.

One of the most enduring myths of Social Security is that a worker has a legal right to his or her Social Security benefits. Most workers assume that because they pay Social Security taxes into the system their whole working lives, they have some sort of legal guarantee to its benefits.

They assume wrong. In two landmark cases, Flemming v. Nestor and Helvering v. Davis, the U.S. Supreme Court ruled that workers have no right to receive Social Security benefits. Congress and the president may change, reduce or even eliminate benefits at any time. Retirees must depend on the good will of 535 politicians to determine whether and how much they will receive in retirement. Where is the dignity in such a system?

In fact, Congress has already voted to reduce Social Security benefits. For example, in 1983, Congress raised the retirement age. Given the system's looming financial crisis, additional benefit cuts and/or tax increases are a mathematical certainty.

The lack of property rights also translates to poorer bequests. Since workers do not own the money they pay in Social Security taxes, they are unable to pass on their inherited retirement savings to their heirs. No matter how much the worker has paid in Social Security taxes, the benefits are reduced at death and then expire with the spouse.

Both of these problems would be solved by an individual account Social Security system. A system based on individual accounts would provide workers with the benefits and the safeguards that come with ownership.

Individual accounts would give all workers a legal right to their benefits. Social Security would no longer be a political shell game, and workers and retirees would not have to worry that politicians might cut their benefits.

In Chinese, the word for crisis is made up of two characters, one meaning "danger," the other "opportunity." Social Security's financial crisis has given us the opportunity to create a better and more secure retirement program.

Creating individual accounts would give workers ownership and control over their retirement funds. It would allow them to build a nest egg of real, inheritable wealth. And, it would belong to them, not to the politicians in Washington. In the end, that is the best reason of all to support individual accounts.