Let Us Opt Out
(print this out, sign it, mail it to Washington D.C.)
perhaps we can get it changed

Texas to Washington:
Privatize Social Security or Let Us Opt Out!

Thanks in part to President Clinton, who has called for "a national conversation" on Social Security reform, Americans may soon embrace the most sweeping changes to our retirement system since 1935-the year Social Security was enacted. No question about it: something must be done soon to avoid a financial crisis and fortunately, there's a new willingness to explore options that previously were politically untouchable.

In just fifteen years, Social Security will start running deficits as baby boomers retire in large numbers and benefits begin to outstrip revenues. Lest anyone think that there are billions of dollars waiting in a trust fund for the system to tap, forget it. The Social Security Trust Fund consists of four brown file folders in Parkersburg, West Virginia, containing receipts for $650 billion in U. S. Treasury bonds. The trust fund has been spent. It is nothing more than an accounting gimmick and redeeming the bonds to pay benefits after 2012 will require a huge tax increase on young workers.

Social Security has probably reached the end of the line as far as the public's tolerance of further payroll tax hikes is concerned. An Associated Press poll taken in March found nearly 76 percent of all Americans opposed to raising taxes to fund the system. And nearly 90 percent of younger workers-those between ages 18 and 34-want to shift at least some of their Social Security tax payments into private investment accounts.

One thing that Texas can do to hasten meaningful reform is to join hands with the state of Oregon. One year ago, a majority of both houses of its legislature made Oregon the first state to petition Congress to establish a waiver system for states to design and implement alternatives to Social Security for all residents. Governor Bush should call upon the Texas legislature to do the same.

The idea of "opting out" is very reasonable and has actually been accomplished with great success. Paul Farago, a senior advisor to the Oregon-based Cascade Policy Institute and an architect of the opt-out concept, notes that the original Social Security act allowed municipal governments to go on their own. As recently as 1981, employees of Galveston County, Texas, voted by a margin of 78 percent to 22 percent to leave the federal program for a private alternative. Two other nearby counties soon followed. Congress closed the loophole in 1983 but today, Farago points out, the thousands of workers in those Texas counties who opted into the private plan pay about the same in contributions but are getting several times the return compared to Social Security.

If Texas were to make a bold statement by following Oregon's lead, it might add to the pressure for Congress to take the correct course for all Americans. That correct course is not to raise taxes and not to put benefits off by raising the retirement age further, but to put individual citizens in charge of their golden years. In other words, end Social Security as we know it and privatize it.

Partial or total privatization of retirement systems is a trend that is sweeping the world. Chile was the first country in this hemisphere to adopt a national, government-sponsored social security program (in 1924) and the first in the world (in 1981) to end it by substituting a privately funded and administered plan. Chilean workers have earned an astounding, average annual rate of return, after inflation, of 12 percent during the past 15 years. Great Britain and Australia have joined the privatization bandwagon, as have Argentina, Peru, Hungary, Romania, Croatia, and even Russia and several other nations. If they can do it, why can't America?

How risky would it be for American citizens to invest their own retirement savings in the stock market? An analysis of the historical performance of stocks from the prestigious Wharton School in Pennsylvania shows that while there certainly have been single-year periods and even five-year periods in which the stock market averaged a negative return, the longer the period stocks are held, the less the risk. Never in American history did stocks produce a loss-in real terms-over a twenty-year period. The very best return on stocks in any twenty-year period was 12.6 percent and the very worst return was, at one percent, still much better than today's younger workers can expect from the Social Security system!

When Social Security was first enacted, there were 30 Americans paying in for every one beneficiary. Today, that ratio is just three to one and in barely another generation, there will be just two payers for every recipient. This intergenerational Ponzi scheme will collapse before then in an actuarial nightmare, harming all Americans, unless Congress acts soon to return control of retirement decisions to citizens instead of politicians.

Texas can help the nation get this job done right if it sends a message to Washington now: Either privatize Social Security or let our people go!

A twelve step plan, is this too complicated for you?

1. Guarantee benefits to current retirees. Because they have counted on the existing Social Security system and incorporated it into their retirement planning, current retirees and those nearing retirement should be guaranteed the benefits they were promised. Younger workers who voluntarily choose to remain in Social Security should not receive the same guarantee. The cost of their benefits could be controlled by: (1) increasing the retirement age, which is already scheduled to rise gradually to age 67 for those born in 1960 and later, and indexing it to increases in life expectancy; (2) using a more realistic price index to adjust benefits for inflation; and (3) including Social Security benefits in retirees' taxable income.

2. Give workers a choice between the public system and a private plan. People working and paying taxes into the system should have the option of remaining in Social Security or moving to a private plan. Those who choose to do the latter would have to deposit a part of their Social Security payroll taxes - currently 12.4 percent of payroll - into their private retirement account. These funds would be invested in stocks, bonds and real assets that would fund the workers' retirement and other benefits covered by Social Security. In the case of death, private account balances would become part of the deceased's estate.

3. Give workers credit for Social Security taxes already paid. Workers who choose the private option should receive full or partial credit for the money they have already contributed to the Social Security system. One way to do that would be to give them "recognition bonds" backed by the full faith and credit of the government. These nonnegotiable bonds could be cashed in at retirement to supplement their income from the private accounts, as was done in Chile. Alternatively, workers choosing the private option could receive Social Security benefits in amounts based on their previous contributions in addition to their private accounts.

4. Sunset the existing program. Although the current generation of workers could choose between public and private options, Congress should establish a time at which anyone entering the labor market would have to participate in the private system. Thus the number of those in the public system would slowly decline, and when no one was left, the public system would end.

5. Make contributions mandatory. The traditional argument for compulsory Social Security is that if contributions were optional some people would spend all of their income during their working years and be dependent on the rest of society during retirement. Whether or not this argument is valid, contributions to either the public or the private system should be mandatory - at least during the transition.

6. Include life and disability benefits in private plans. In addition to retirement income, Social Security provides disability income for individuals who are injured and cannot work, as well as a death benefit and survivors' benefits for widows and widowers age 60 or older and children under 18. Those who choose the private option should be required to purchase life and disability insurance as part of their plan. Participating insurers would have to accept all applicants. The experience of three Texas counties that opted out of the Social Security system in 1981 and 1982 is instructive. Under the plan adopted by Galveston, Brazoria and Matagorda counties, public employees receive a life insurance benefit three times the worker's salary (with a minimum benefit of $50,000 and a maximum of $150,000); by contrast, Social Security pays a one-time death benefit of $255 to a surviving spouse plus survivors' benefits to those who qualify. Disability insurance under the counties' private plan pays 60 percent of an individual's salary until age 65 or until the individual returns to work.

7. Protect spouses. Deposits to the private accounts should be divided equally between husband and wife at the time they are made. In case of death, the surviving spouse would gain control over both accounts. In case of divorce, each spouse would retain his or her account.

8. Offer a choice of private plans. The key to consumer satisfaction in creating such private and individual retirement accounts is competition. The law should permit a number of federally approved private-sector plans to compete to manage workers' private pension accounts. (Chile currently has 13 plans.)

9. Require investment funds to maintain diverse portfolios. To insure that private accounts grow enough to pay minimum benefits in retirement and that workers' contributions are financially secure, private plans must hold diversified portfolios. Workers would not choose among individual securities or be allowed to make highly speculative investments.

10. Require retirees to purchase minimum-income annuities. To ensure that retirees do not deplete their retirement funds too quickly, individuals should be required to purchase an annuity at retirement that would pay a fixed monthly amount- say, 60 percent of their preretirement income - for the rest of their lives. Funds above the amount needed to purchase the annuity would not be restricted. After they purchased the annuity or set aside funds for its purchase, they would not have to make further contributions.

11. Guarantee that private account holders don't lose. While there is every reason to believe that all workers would be better off, government should guarantee that no one will be worse off for having opted out of the public system. At least during the transition period, the federal government should be prepared to "top up" the personal retirement account of any retiree so that the retiree could purchase a minimum-income annuity comparable to what would have been paid by Social Security.

12. Let people choose their own retirement age. As long as individuals have sufficient funds in the account - including the credit for those who are partially under the old system - to purchase a lifetime annuity, they should be allowed to retire whenever they choose.

Conclusion. Given Social Security's shaky financial status and the baby boomers' impending retirement, the question is not whether to reform Social Security, but how. Legislation that includes these basic principles - many of which have already been tested in other countries - would solve the financing problems while ensuring the safety and solvency of seniors' retirement accounts.