The issue of Social Security reform has arguably been the most talked about and debated public
policy issue of the recent past. Most people think that something
must be done if we wish to keep the program from going bankrupt, but what?
A recent article in the Brookings Review (Summer, 1998) looked
at the results from a number of surveys to draw conclusions about the public’s
attitudes toward the program.
What can be done?
Raise Social Security payroll taxes?
Only 40% favor raising taxes or eliminating the high income
cut-off to cover the shortfall.
Only 25% favor taxing benefits, and only 20% favor reducing
Invest in high return stocks?
This option is often put forth as a magic bullet cure to the
problem. If we can somehow get the money from Social Security taxes into
the stock market we can tap into a new source of income. (There are of
course many potential problems with this option, see Social
Security Reform Readings for the pros and cons of privatization.)
Who should do the investing, individuals or the government?
As the table below shows, there appears to be much more support for
letting individuals make their investment decisions. The numbers also show
that investment in stocks by the government is not supported.
|People should have individual accounts and make their own investments|
with a portion of their Social Security payments.
|Government should invest in the private stock market a potion of Social|
Security reserve funds, currently invested in government bonds.
|Let workers shift some Social Security tax payments into personal retirement|
accounts that they would invest on their own.
|Let people invest some of their Social Security tax payments in the|
stock market, with benefits higher or lower then expected depending on
the stock market’s performance.
|Invest some Social Security revenues in the stock market instead of|
putting them all in government bonds.
|Let government invest part of the money it holds in Social Security|
in the stock market.
One striking observation from the survey responses is that there appears
to be much less support for investing in the stock market once it is acknowledged
that the returns to the investments, and hence individual benefits, may
be low if the market – or the investor – does poorly.
This raises one of the most sticky parts of the individual-decision
privatization movement. If the stock market as a whole does poorly will
there be a guarantee of a minimum benefit? If not, are we willing to let
those who happened to make poor investment decisions suffer low benefits
in old age?
On the other hand if there were a minimum benefit, we may end up with
another savings-and-loan-type bailout since people will have an incentive
to make extremely risky investments knowing that there is no real down side.
If these risky investments fail – will we willing to bailout these “reckless” investors?
Historically, the stock market has outperformed bonds; however, it is still
necessary to spell out exactly what would be done if there is a market
downturn that results in low benefits for some retirees. We also need to figure
out how to treat that investor who put their Social Security money into
a risky venture which then failed. In my opinion, privatization proposals
are incomplete without these contingencies explicitly spelled out.