Perhaps the single biggest dereliction of duty between the two major presidential campaigns this year was their refusal to get serious about the crisis looming in Social Security financing. An insightful new study shows why a private-sector or market-driven component should be part of the solution to the oft-ignored problem.
The study is co-authored by veteran economist Dan Mitchell, president of the Center for Freedom and Prosperity, and Robert O’Quinn, former executive director of the Joint Economic Committee of Congress. Released Dec. 13 by the Fraser Institute, the 25-page analysis shows that the United States lags among developed nations in its refusal to include market features as a significant portion of its old-age financial guarantees.
All 38 nations of the Organization for Economic Cooperation and Development boast government retirement pensions. In 16 of them, participation in a government-backed, private retirement option is mandatory, usually as the primary part of a senior’s pension. Among those 16 are top-10 per-capita economies Switzerland, Denmark, and Iceland, as well as ones as varied as South Korea, Chile, and Latvia.
Most of these plans work well and, in the process, boost those nations’ economies rather than draining their resources. As the authors explain, “People save, and their savings are invested to create an asset portfolio that will, in time, generate income for their own retirement…. [even as they] finance additional business investment and boost long-term real GDP growth.”
That’s what private investment does: It boosts macroeconomic growth.
“In stark contrast,” the report continues, “tax-financed, pay-as-you-go government retirement plans [such as Social Security in the U.S.] diminish private savings and business investment and depress long-term real GDP growth because these plans are financed by taxes and borrowing.”
Even worse, the U.S. and almost every other “developed” nation is suffering birth rates well below the “replacement” level, meaning there is a significantly declining percentage of young workers to pay taxes for the Social Security of retirees. Systems that rely on taxes rather than market investments must impose higher and higher employment levies to make up for the birth dearth. In the U.S., that system is rapidly becoming unsustainable.
As is well known, the Social Security “trust fund” is projected to become insolvent by 2034, which would require an immediate 23% cut in benefits unless corrective action is taken.
Andrew Biggs of the American Enterprise Institute reports that a forthcoming study of his will show that if former President George W. Bush’s Social Security investment plan had been adopted in 2005, all but the highest salary earners would by now be seeing benefits 2.5%-3.5% higher than they are. Meanwhile, Biggs said the Bush plan would have extended the system’s solvency as well.
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There are all sorts of ways to include investment features in a national pension system. Sen. Bill Cassidy (R-LA), for example, is leading a bipartisan working group considering “a new fund separate and independent of the Social Security Trust Fund. This would invest $1.5 trillion in financial markets” and would be “accruing returns over 70 years with a diversified investment portfolio and strong guardrails.” In essence, Cassidy wrote, it would operate “ like a normal [private sector] pension fund,” and the earnings should cover more than two-thirds of Social Security’s staggering projected long-range shortfall of $615 trillion.
Whether with Cassidy’s approach, Bush’s, or another variation, Congress should energetically pursue market-based reforms to Social Security. There is no good reason a nation as wealthy as the U.S. should lag behind South Korea and Latvia in commonsense approaches. While the system still needs other tweaks and savings to reach full solvency, an investment feature should be part of the reform.