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What The Media Tell Americans About Free Enterprise

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April 1996


Privatized Paupers? No
Guest Editorial, by Stephen Moore

On March 11 and 12, the CBS Evening News broadcast a two-part "Eye on America" segment by Ray Brady focusing on Social Security privatization. What started out as a compelling case for reform of the soon-to-be bankrupt pension program ended up as a broadside attack against the most promising reform -- privatization.

First, the background. Social Security now has an unfunded long-term liability of more than $5 trillion -- which exceeds the entire national debt. In 35 years, the system will be financially insolvent. Kaput. As CBS rightly pointed out, in 1950 there were 17 workers for every retired person. Today there are three; by 2030 there will be just two. To keep the system solvent at current benefit levels would require the tax rate to rise from 15 percent to as much as 30 percent. If there were ever a program that needed major reform, it is this one.

CBS discussed one potential way out of the box: to privatize the system and allow individual workers to place their payroll tax dollars into a personalized account, like an expanded IRA. Under rules established by the government, workers could invest this money in mutual funds and other investments. Brady interviewed Jose Pinera, the former economic minister of Chile, where privatization was adopted some 15 years ago. The results there have been remarkably successful. Chilean workers are now receiving a 13 percent annual rate of return on their Social Security investments.

Brady then cited a Cato Institute study documenting that in the United States, if a low-income worker were permitted to place his payroll taxes into an IRA, and that worker earned just the average rate of return on stocks and bonds since 1946, that worker would receive a benefit of $1,650 more per month from the IRA than under Social Security. As one of the editors of that study, I can attest that the results were reviewed by well-respected actuaries who found no fault with the methodology.

Brady, however, launched an attack against privatization by arguing that the Cato study made "dangerously optimistic assumptions." The "dangerously optimistic assumption" was that over the next 50 years investors will yield roughly the same average real rate of return in stocks and bonds as was recorded by financial markets over the past 50 years. No one knows for sure whether the markets will perform better or worse. Still, it is worth noting that over the past several years the stock market has substantially outperformed the average rate of return since 1945.

Then CBS rolled out objections to the plan, such as claims that the plan only works if "workers work their whole lifetime in a boom stock market." This is patently false. If we had a boom market for the next 50 years, and we privatized Social Security, most American workers would be millionaire pensioners when they retired. But even if workers placed all of their payroll tax into low-risk, low-return bonds, privatization is still a very good deal for workers of all incomes, vis-a-vis a non-privatized system.

The CBS report saved its heavy artillery for last. Brady said that instead of "making educated guesses about the future, like the proponents of privatization, we took a look at how a Social Security stock plan would have performed using real data from the past." (Note the false inference here, that the Cato Institute study did not "use real data from the past.") "Using an independent firm," CBS reported that a wealthy worker would get $30,000 more under privatization, but a low-income worker would get $13,000 less. Conclusion: privatization is unfair.

Just how were those numbers derived? Alas, we will never know. After repeated requests for the methodology, CBS has refused to reveal what firm produced them, what actuarial assumptions were used, and any other information about the results. While CBS was quick to attack privatization advocates for using "dangerous assumptions," that charge can't be made against CBS; the company won't tell us what their assumptions were. For all we know, the numbers were simply made up out of thin air.

Finally, CBS concluded that most Americans oppose Social Security privatization. How should the system be fixed, then? "Cut benefits and raise Social Security taxes." Two problems here. First, virtually every poll over the past ten years shows that raising the payroll tax is by far the least popular "fix" to the Social Security system. Second, raising the tax level and reducing the promised benefit make Social Security an even worse deal than it already is for young workers. Now they would have to pay more in for a lower benefit. What a deal! If we "reformed" Social Security in the way CBS suggests, privatization would be manifoldly more attractive to workers. Was this taken into account when CBS said low-income workers would be worse off under privatization?

Social Security reform is perhaps the single most important issue to young workers in America. What is needed is a careful, balanced, and reasoned presentation of the options. Too bad Ray Brady and CBS failed to provide it.

Stephen Moore is director of fiscal policy studies at the Cato Institute.


Rich Noyes


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