About the Project on Social Security Privatization
The Cato Institute has a long history of seeking alternatives
to the current Social Security system. Since 1979 the Cato Institute has published
more than 40 books, articles, and reports outlining the program's problems and
crafting innovative policy solutions.
On August 14, 1995, the Cato Institute launched its Project
on Social Security Privatization, the largest undertaking in the organization's
history. The objective of the project is to formulate a viable blueprint for
privatizing the Social Security system. The project publishes books, studies,
and articles and holds conferences. The Cato Institute's experts examine the
problems facing the current system, the methods that can be used to move towards
a system of personal retirement accounts, and the effects that a new system
would have on workers.
The Cato Project on Social Security Privatization has developed
a market-based alternative to the current Social Security system. Rather than
paying taxes into a government-owned fund, workers should be allowed to redirect
their payroll taxes into individually owned, privately invested accounts, similar
to 401(k) plans and Individual Retirement Accounts. The benefits of adopting
a private retirement system based on savings, investment, and personal ownership
- A substantial increase in retiree incomes as a result of higher returns
on payroll taxes.
- The potential to eliminate poverty among retirees.
- Worker empowerment.
- Personal control.
- Greater retirement security.
- Provides a death benefit to loved ones in the event of premature death.
- Gives workers the ability to pass down wealth directly to their children.
- An unprecedented burst of economic growth.
The Cato Institute has outlined the following principles
Solvency is not enough.
Workers deserve the best possible deal for their dollar. With Social Security
facing a financial crisis--it will begin running a deficit in just 15 years--much
of the attention has been focused on ways to keep the program solvent. Theoretically,
this could be accomplished by raising taxes or cutting benefits. But Social
Security faces a second crisis as well. Young workers will receive a negative
rate of return from the program, less back in benefits than they pay in
taxes. This low return, and other inequities, particularly disadvantages
women, the poor, and minorities. Any Social Security reform must reverse
this trend, raising the rate of return and providing higher retirement benefits.
Individuals, not government, should invest.
The only way to increase Social Security's rate of return is to invest Social
security taxes in real capital assets. This should be done through the creation
of individually owned accounts, not by allowing the government to directly
invest payroll taxes. Individual accounts would give workers ownership and
control over their retirement funds, allowing them to accumulate wealth,
pass that wealth on to their heirs, and would give them a greater stake
in the American economic system. Government investment would allow the federal
government to become the largest shareholder in every American company,
with the potential threat to corporate governance and the specter of social
Maximize consumer choice.
Workers should be given as wide a range of investment opportunities as possible,
consistent with regulatory safeguards against fraud or speculation. While
investing in "Singapore derivatives" is clearly not envisioned, there is
no reason to limit workers to only 2-3 index funds. As much as possible,
the existing retirement savings infrastructure should be utilized, meaning
workers would have a large number of safe and secure options. Moreover,
a safety net would be provided guaranteeing that no senior would end up
in poverty as a result of bad investments.
Don't touch Grandma's check.
Benefits to the currently retired and nearly retired should not be reduced.
Indeed, by explicitly recognizing benefits owed to current retirees, privatization
would guarantee those benefits in a way that the current political system
does not. Making the transition to a new system while guaranteeing current
benefits means that the government will have to issue debt, cut current
spending, or sell assets, but those "transition costs" will be substantially
less than the costs of maintaining the current system.
More privatization is better than less.
You don't cut out half a cancer. Given the advantages of a privatized Social
Security system, there is no excuse for stopping at the privatization of
only 2-3 percent of payroll taxes. Once Congress has conceded that private
capital investment can provide better and more secure retirement benefits,
it should press on and allow workers to control the maximum feasible amount
of their retirement income.