Introduction
Policymakers and the public show growing interest in the idea of replacing Social Security with a private system of individual retirement accounts. It is too soon to tell whether curiosity will lead to popular acceptance, but it is already plain that many Americans are thinking about private alternatives to Social Security for the first time.
Proponents of privatization see three main arguments, in addition to ideological advantages, for moving toward a private retirement system:
- it can lift the rate of return workers obtain on their retirement contributions;
- it can boost national saving and future economic growth;
- it has practical political advantages in comparison with a Social Security rescue plan based on higher payroll taxes and a bigger accumulation of Social Security reserves.
Any transition to a private system must overcome a major financial hurdle, however. Social Security has accumulated trillions of dollars in liabilities to workers who are already retired or who will retire soon. To make room for a new private system, policymakers must find funds to pay for these liabilities while still leaving young workers enough money to deposit in new private accounts (Martin, 2000). This requires scaling back past liabilities - by cutting benefits - or increasing contributions from current workers. Most large-scale privatization plans also involve major new federal borrowing. Consequently, if a balanced budget amendment becomes part of the constitution, it would torpedo any attempt to replace most of Social Security with a private retirement system.
Arguments for Privatization
Any discussion of reform should begin by recognizing that the current retirement system is already a mixture of public and private plans. The public plan is universal but skewed toward protecting low-wage workers. Private or employer-sponsored plans cover about half the full-time work force, but they tend to leave part-time and lower-wage workers uncovered (Martin, 2000)...................
