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Social Security Privatization: One Proposal
by David Altig and Jagadeesh Gokhale
David Altig is vice president and economist and Jagadeesh Gokhale is an economic adviser at the Federal Reserve Bank of Cleveland. The views contained herein do not necessarily represent those of the Federal Reserve Bank of Cleveland or the Federal Reserve System.
Executive Summary
As Social Security's problems become more apparent, there is growing support
for privatizing the retirement program. As the debate intensifies, it becomes
more important to move beyond generalizations and provide detailed proposals
for accomplishing privatization. Without endorsing any specific proposal, the
Cato Project on Social Security Privatization will present a number of possible
privatization scenarios.
In this study, David Altig and Jagadeesh Gokhale offer a proposal based on
the following key elements:
- Workers under age 32 would be allowed to divert up to 46 percent of their
payroll taxes to individually owned, privately invested accounts, similar
to individual retirement accounts or 401(k) pension plans. The remainder of
the payroll tax would be used to continue to provide benefits for the currently
retired and those who will retire soon.
- Assuming private investment returns below historic averages, individuals
in the privatized system would receive retirement benefits equal to or greater
than those currently promised by Social Security. However, individuals would
receive no recognition of or benefits based on past payroll taxes paid.
- During the early years of the transition, the government would issue new
debt to supplement revenues from the continuing portion of the payroll tax.
Once benefits to current and soon-to-be retirees had been paid, the continuing
portion of the payroll tax would be used to service and retire the debt.
- No new taxes are required to finance the transition.
The authors make the important point that the window of opportunity for such
a privatized system is narrow. For example, if the system were implemented immediately,
workers under the age of 32 could shift to the privatized system, diverting
46 percent of their payroll taxes to individual accounts. However, if privatization
were delayed until 2011, only individuals under the age of 20 could move to
the new system, and those individuals could divert only 22.1 percent of their
payroll taxes. Therefore, moving to a privatized Social Security system takes
on a new urgency.
Index of Social Security Choice Papers
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