Most Baby Boomers and all Generation Xers would be better off financially under a Chilean-style plan allowing them to opt out of Social Security. Moreover, such an opt-out plan would substantially reduce the future liabilities of the U.S. Social Security system.

In Chile more than 90 percent of workers covered under the old government social security system have chosen to move to a system of private retirement accounts since 1981.

• Chile gave workers who opted out interest-bearing bonds equal to the present value of their future social security benefits, which they can redeem on retirement to buy a private insurance annuity.

• Instead of paying a payroll tax, new workers and those who opted out are required to contribute to an approved private pension plan of their choice.

• The private plans are similar to tax-free mutual funds, and workers can pass on any unused funds to their heirs.

Suppose U.S. workers were allowed to opt out under similar terms in 1996. They would receive interest-bearing bonds equal to the inflation-adjusted payroll taxes they had already paid, which they would use to purchase an annuity at retirement. In addition, until retirement they would contribute the amount they would have paid in payroll taxes to a private pension fund.

Assuming a relatively low interest rate on the bonds and low rate of return on their invested funds, those who would be better off financially if they opted out include:

• Every low-wage couple retiring in 2025 (age 37 in 1996) or thereafter.

• Every average-wage couple retiring in 2013 (age 49 in 1996) or thereafter.

• Every high-wage couple.

In addition, since workers who opted out would not earn more benefits, the private system would reduce future liabilities of the U.S. government. For example, an average-wage couple retiring in 2015 can expect $45,631 in inflation-adjusted annual Social Security benefits. If they opted out, the federal annualized liability would be only $27,416 - a 40 percent reduction in the expected payout. (The rest of the couple's retirement income would come from their pension fund, which would provide an estimated $19,386 annually.) However, without payroll tax revenues, these liabilities would have to be paid from general funds, as in Chile.

Interestingly, even if, on opting out, they lost all of the benefits associated with their previously paid payroll taxes, average-wage couples age 33 or younger in 1996 and high-wage couples age 38 or younger would still come out ahead.

Source: Arthur P. Hall, "Social Security: A Bleak Outlook for Baby Boomers," Special Report No. 56, January 1996, Tax Foundation, 1259 H Street, NW, Washington, DC 20005, (202) 783-2760.