The re-engineering of Social Security

Nation's Business, May, 1997 by James Worsham, Robert T. Gray

A rival proposal from another faction within the Advisory Council--Option I--would raise the tax rate by 0.8 of a percentage point each on employers and employees in 2045.

Any tax-rate increase could face tough opposition. But for small firms, the Social Security dilemma comes down to one thing: the tax rate. "It's the only thing that affects us directly, and hopefully that cost won't go up," says Charles Armstrong, president of Capital Nursery Co. in Sacramento, Calif. "It's high enough as it is." The 65-year-old Armstrong, third-generation president of the firm, expressed his views through the Nation's Business poll.

Privatization

Social Security's assets are invested in government bonds, but millions of Americans have private pension plans, individual retirement accounts, or special tax-free savings accounts--such as 401(k) plans--through their employers.

Some critics of the system recommend privatization as a solution. In this debate, that term is being broadly defined as investing some or all of Social Security's assets in private financial markets--stocks, bonds, and mutual funds, for example--either by individuals or by the government.

Privatization has attracted support from some small-business owners and opposition from others. "I'm in favor of going to IRA-like savings," says Ernest King, president of King Laboratories Inc. in Tampa, Fla., which tests petroleum for airlines and oil firms. King, another of the respondents to the Nation's Business poll, adds: "The idea that we're in this all together is old-fashioned. We can't do that anymore."

The various proposals for privatization can be grouped in three major categories:

Total privatization of Social Security has been suggested most prominently by the Cato Institute. Cato, which has a set of broad principles rather than a detailed proposal, would privatize the system along the lines of the system in Chile. (See "The Chilean Precedent,".)

Tanner, head of the institute's Social Security privatization project, says Cato generally supports a Chilean-style plan under which all Americans would eventually save for their retirement through mandatory personal savings accounts that would be held with private investors. The government would still provide a minimum benefit to all workers, financed from general federal revenues.

One of the three proposals advanced by the Advisory Council--Option III--resembles the Chilean plan. It would funnel about 40 percent of Social Security revenues into personal savings accounts, while the rest would go into a fund to provide a minimum retirement allowance for all Americans.

Small-scale privatization with individual personal savings accounts is part of a number of proposals. Under this approach, an individual would put a portion of what he or she would normally have in Social Security into an account to be in: vested either by the individual (the Advisory Council's Option III) or by the government in private financial markets (Option II). In some proposals, these would be set up within the Social Security system; in others they would be separate.