A social security system that works

August 25, 2010

I’ve long advocated  privatizing Social Security, our nation’s public pensions system. The current set up, while supposedly a trust fund, is really just a piggy bank that lawmakers of both parties have raided time and again over the decades to pay for their grandiose programs while promising to pay it back later.  The fact is, the system is broke. It’s just a giant Ponzi scheme in which current workers are paying retirees in the expectation that future workers will pay the current workers when they themselves retire.

The hash that government has made of Social Security should be reason enough alone to take the money out of the politicians’ hands. But there are also positive reasons, too: rather than depending on the labor of others to pay for retirement at a rate determined by a distant bureaucrat, a worker builds up his own funds that he can use as he wishes, even leaving it to his children to augment their nest-eggs, and it treats citizens as responsible adults rather than infantilizing them.

We also have an empirical example of a private social security system that has worked, and worked well, for decades:

Unlike the United States and most European nations, Chile does not face a long-term Social Security crisis. This is because lawmakers shifted to a system of personal accounts almost 30 years ago. As a result, Chile’s economy is much stronger, the financial system is healthy, workers are better off, and taxpayers are protected. It also turns out that a system of personal accounts has a positive impact on the labor supply of older workers. Instead of getting lured into retirement by a punitive tax-and-transfer government system, they remain active to reap the rewards of a system that rewards them (rather than tax collectors) for continued work.

Seeing the problems of our own system, the even worse ones facing European public pension systems, and then contrasting them with the private Chilean system should make the choice to transition to a private Social Security system easy. But, when Bush tried even a moderate reform in 2005, the statist Democrats and their big donor groups fought it tooth and nail, and won.

Our system is only going to get worse as our population ages, requiring a huge tax burden on current and future workers to pay the benefits of those in the system or soon to enter it. A transition to a private pension system will be hard, but it will be even harder in the future. Unfortunately, with the (Social) Democrats in charge, we’ll have to wait until at least 2013 before any meaningful reforms can be made.