Social Security Reform@30b: Proposalto priv



    Cutting income taxes, balancing the federal budget, protecting U.S. jobs, reforming Medicare, overhauling the welfare system. These are issues most following the 1996 presidential campaign are familiar with. But one issue that hasn’t gotten much publicity is the proposal to privatize Social Security.

    The Social Security system is going broke, say many politicians and reform groups. In fact, more people believe in UFOs than believe they will receive their retirement benefits, according to a recent public opinion poll. The poll was conducted by the Cato Institute.

    Since 1979, the Cato Institute has published more than 30 books, articles and reports outlining the program’s problems and crafting policy solutions for Social Security.

    “Retiring with financial dignity is in jeopardy,” said William Shipman, a principal with State Street Global Advisors in Boston, as well as co-chairman of the Cato Institute’s project on Social Security Privatization. “That is the direct result of Social Security’s ever-expanding role in the economics of both retirees and workers. Compassionate in intent, but flawed in design, Social Security will prevent many from enjoying financial security in their later years.”

    The Cato Institute, as well as many others, including former Republican presidential candidate Steve Forbes, have proposed private pension plans for workers to invest a portion of their incomes to retirement. The workers manage their own accounts, and the money is invested where it can grow with time.

    “The way to save Social Security is to make the magic of compound interest work for its beneficiaries,” said Sam Beard of Policy Review, on the Cato Institute’s Web page. “The plan will save Social Security and enable 100 million Americans to become millionaires. The plan keeps Social Security as a mandatory, redistributive savings program, but it converts the program from the current pay-as-you-go system to a funded system, in which individuals own retirement portfolios at Social Security and choose private investment managers. Individuals would be allowed to set aside portions of their Social Security payments, together with additional voluntary contributions, in their own personal accounts.”

    Beard’s plan has four elements:

    -Pay existing obligations to all current retirees. Social Security benefits would be paid to all existing retirees, as promised, without changes, and without reductions.

    -Divide Social Security into two tiers. If one is working now, they continue to pay into the existing system with their employer. Some of that would go to pay benefits of existing recipients and some would go into the individuals’ personal account. Payroll taxes would be cut by 2 percent around 2040.

    -The benefits of current retirees would be paid out of the first tier of current payroll taxes. When they retire, current workers would draw benefits from two Social Security sources: income from future payroll taxes and income from their personal retirement accounts.

    -Create personal investment and retirement accounts for the second tier of Social Security. Every worker who earns at least $4,000 would have his own IRA-like account with Social Security. The first $500 that a worker and his employer pay into Social Security every year would be automatically deposited in that person’s retirement account.

    There are many advantages, Beard said.

    “Use your capital account to increase your retirement income, and pass on your assets tax-free to your children. When you retire, you would have two attractive choices of what to do with your capital account. One would be to use income from your capital for your retirement benefits and then, when you die, to pass it on to (your family).”

    Not all are in favor of overhauling the current system, at least for now. Shirley S. Chater, the National Social Security Commissioner, feels it is vital to inform the public about the benefits of the current system before drastic changes are needed.

    “Americans everywhere need to understand how the program protects them, the value it brings to their lives, and the challenges we face in the next century to keep Social Security strong and solvent,” Chater said. “I want to get people involved in the national debate over the system’s future. But to do this, we first have to educate people about the current program in order to increase public confidence and bring about a broad-based consensus on the type of reforms the American public would be willing to support.”

    One country that has benefited from privatizing the pension system is Chile. The Cato Institute, as well as many other advocates of reform are patterning their proposals after that which Chile has done.

    “We understood that the pay-as-you-go system had a fundamental flaw, one rooted in a false conception of how human beings behave. That flaw was lack of a link between what people put into their pension program and what they take out,” said Jose Pinera, president of the International Center for Pension Reform and co-chairman of the Cato’s Project on Social Security Privatization.

    Pinera was Chile’s Minister of Labor during their pension program overhaul in 1981.

    “We decided to link benefits to contributors. The money that a worker pays into the system goes into an account that is owned by the worker. We called the idea a ‘capitalization scheme.'”

    Pinera said Chile has enacted the same reforms as proposed by the Cato Institute. Those include: a 10 percent minimum, 20 percent maximum contribution; returns from a private institution that are untaxed; and options as far as how long one wants to work before retiring.

    The system in Chile is managed by competitive private companies called AFPs (from the Spanish for pension fund administrators). Each AFP operates the equivalent of a mutual fund that invests in stocks, bonds and government debt. The AFP is separate from the mutual fund, so if the AFP goes bankrupt, the assets of the mutual fund — that is, workers’ investments — are not affected.

    In 15 years of privatization, none of Chile’s 20 AFPS has gone bankrupt, Pinera said, and workers have not lost a dime.

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