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Privatizing Social Security
July 1998
Notes
1 1998 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Disability Insurance Trust Funds, Washington, D.C., April 1998.
2 Jagadeesh Gokhale, Benjamin Page and John Sturrock, "U.S. Generational Accounts: An Update," The Review of the Federal Reserve Bank of Cleveland, Spring 1998.
3 Of course, current law could change. But achieving generational balance - a situation in which our descendants face the same lifetime net tax rates as we face - would require changes in fiscal policy that go far beyond anything now being discussed in Washington. For example, the ways of creating generational balance include cutting all current and future government purchases by one fifth, raising federal income taxes immediately and permanently by one-quarter, or cutting all Social Security, Medicare and other transfer payments immediately and permanently by one-fifth.
4 Jagadeesh Gokhale and Laurence J. Kotlikoff, "Medicare from the Perspective of Generational Accounting," paper presented at program on "Medicare Reform: Issues and Answers," April 3, 1998, Texas A&M University.
5 See Jagadeesh Gokhale, Laurence J. Kotlikoff and John Sabelhaus, "Understanding the Postwar Decline in U.S. Saving: A Cohort Analysis," The Brookings Papers on Economic Activity, 1996.
6 This estimate and the ones that follow are based on the intermediate assumptions.
7 The remainder of this paper draws heavily on my June 3, 1998 testimony to the House Ways and Means Subcommittee on Social Security entitled "Privatizing Social Security the Right Way."
8 See Steven Caldwell, Melissa Favreault, Alla Gantman, Jagadeesh Gokhale, Thomas Johnson and Laurence J. Kotlikoff, "Social Security's Treatment of Postwar Americans," forthcoming in Tax Policy and the Economy, NBER volume, MIT Press, 1999. The study does not consider Social Security's disability insurance (DI) program.
9 It does so taking into account Social Security's earnings test, family benefit maximums, actuarial reductions and increases, benefit recomputation, eligibility rules, the ceiling on taxable earnings and legislated changes in normal retirement ages.
10 Baby boomers are projected to lose roughly 5 cents of every dollar they earn in net Social Security taxes (taxes minus benefits). Generation Xers and today's children will lose over 7 cents of every dollar they earn in net taxes.
11 If taxes were raised immediately by the amount needed to pay for benefits on an ongoing basis, baby boomers would forfeit 6 cents of every dollar they earn in net taxes. Those born after the baby boom would forfeit 10 cents of every dollar they earn.
12 This version of the Personal Security System plan differs in two details from the original version that was endorsed by Sachs and the other academic economists. Rather than calling for just a diversified portfolio, it insists that all account balances be invested in a single security: the market-weighted global index fund of stocks, bonds and real estate. It also calls for financing the transition with a business cash-flow tax rather than a retail sales tax.
13 These programs also need to be reformed to hold their costs to the levels of their tax receipts. However, whether privatization of these programs is the best method to achieve this objective is a subject for another paper.
14 In Chile, much of the management fee goes to marketing efforts to attract accounts. Chileans can move accounts from one pension company to another.
15 Laurence J. Kotlikoff, Kent Smetters and Jan Walliser, "The Economic Impact of Privatizing Social Security," mimeo, Boston University, June 1997.