For the U.S. Social Security system, the day of reckoning will arrive in 2013. That is when experts say the federal pension system will begin going broke, to put it bluntly. In financial terms, the year marks the point when outlays for retirees' pensions will exceed the retirement system's income from payroll tax revenues and taxes on Social Security benefits.
To postpone what some worried observers are calling doomsday for the retirement system, economists have proposed a number of reforms, including proposals to partially privatize the system.
In fact, an upcoming report by the Social Security advisory council will recommend the need for changes to the system, changes that Democrats and Republicans alike acknowledge are necessary. President Clinton jumped into the fray at the end of July, suggesting that a “test” of changes in the system might be possible, though he said he favored studying the issue closely “before we made a big sweeping decision.”
One of the most widely discussed privatization “solutions” calls for investing some of the billions of dollars in Social Security Trust Funds in corporate stocks and bonds. Historically, private-sector equities have provided substantially higher rates of return than Treasury bonds, in which Social Security revenues are currently invested. The system would still run out of money eventually, but it would remain solvent longer.
Under one privatization scenario, the government would make private-sector investment decisions for each taxpayer. Alternatively, taxpayers themselves would place a percentage of their payroll contributions in tax-deferred savings accounts of their choice, much as millions now do under 401(k) plans at their workplace.
The individual investment approach already has earned high marks in Chile. Starting in 1981, the Chilean government required workers to place 10 percent of their earnings in a government-regulated retirement account. Retirement benefits ultimately would depend on the returns from those accounts, with a minimum benefit guaranteed by the government. In addition, Chilean workers are required to pay an additional 3 percent of wages for commercial life and disability insurance.
So far, the benefit-to-contribution ratio of Chile's privatized system is substantially higher than yields from the old, publicly managed system.
Still, some experts caution that privatizing the U.S. Social Security system would entail drawbacks that could offset the advantages. Lawrence J. White, an economics professor at the New York University School of Business, recently warned that “any diversion of the . . . Trust Funds' assets or future surpluses into equity investments would increase the federal government's [overall] deficit on the remainder of its operations,” since Social Security funds in hand are used in budget calculations. “In turn, this would mean that the government would have to borrow more money from the general public by selling bonds; raise taxes; and/or reduce other expenditures by a commensurate amount.”
White also suggested that letting the Social Security Administration (SSA) decide where to invest trust fund money would have political repercussions. “For example, a decision to restrict the SSA's investments to equity shares in the [Standard & Poor's] 500 is a policy that favors large companies over small ones and equity security investments over all others,” he asserted. “Is this politically appropriate? An improved risk-return position can be achieved by having the SSA devote 20-30 percent of its equity portfolio to foreign companies. Is this politically appropriate?”
Adopting the Chilean model also would pose problems, according to John B. Shoven, a Stanford University economics professor. To begin with, he noted recently, “Chileans had a much, much more favorable set of initial conditions for change than we do. We have 3.2 workers [contributing funds] for every retiree; they had 9. They have an extremely young society, and . . . it's easier to change the retirement system when you don't have many retired people or people nearing retirement.”
Chile also benefited from having a large budget surplus, which enabled the government to pay for the existing retirement system's liabilities out of general revenues. “Obviously, we can't do that here,” wrote Shoven. “We do not have a large federal government surplus. Finally, Chile had a strong dictatorship, which . . . may have some disadvantages, but it certainly makes a radical change simpler to implement.”