On February 5, 2016, Hillary Clinton emphatically stated, “I won’t cut Social Security. … I’ll defend it, and I’ll expand it.” The quote is directly from her website. She went on to say, “We can never let Republicans… privatize Social Security.”
Let’s look at these two “issues.”
Our nation’s largest entitlement program is headed for insolvency. It is not a matter of “if,” but “when.” When it happens it will likely will lead to both large benefit cuts and large payroll tax increases. Unfortunately, the Democrat Party cannot tax its way out of this mess.
[Source: Projections Differ, but Social Security Is in Deep Trouble, by Lauren Bowman and Romina Boccia]
Current Congressional Budget Office projections for Social Security predict the program’s combined Old-Age and Survivors Insurance (OASI) and Disability Insurance trust fund will be exhausted in 2029, while the Social Security Trustees project the combined trust fund will be exhausted in 2034.
The differences arise simply out of the demographic and economic assumptions used to make their predictions. They use different fertility rates and lengths of time that workers remain in the workforce. However, the bottom line is insolvency regardless of the assumptions chosen.
If Hillary “expands” social security the date of insolvency only moves forward. Who cares? She will be out of office!
The second exclamation by Hillary is the more interesting. Let’s look at what would have happened if those evil Republicans had “privatized” Social Security back in the 1980s.
There are now many real world experiments in Privatized Social Security. So, let us check the results. Merrill Matthews, a resident scholar with the Institute for Policy Innovation, recently published the following analysis under the title, “Social Security by Choice.” His analysis is telling.
“The experience of three Texas counties can offer a realistic demonstration of how Social Security can be successfully reformed. Galveston, Matagorda and Brazoria counties opted out of Social Security in the early 1980s, and have since developed and implemented what they call the Alternate Plan.
- Like Social Security, employees contribute 6.2 percent of their incomes, which the counties match with the option of providing more (as Galveston does).
- Unlike a traditional IRA or 401(k) plan, which account holders can actively manage, the contributions are pooled, like deposits to a bank savings account.
- Top-rated financial institutions then bid on the right to manage the funds, offering minimum interest rates that yield significant protection from market downturns.
- The plan avoids the pitfalls of pay-as-you-go systems by giving workers only what they pay in AND NO UNFUNDED LIABILITIES.
The experience of the three counties’ employees over the past 30 years speaks to the effectiveness and efficiency of the plans:
- A lower-middle income worker making about $26,000 at retirement would get about $1,007 a month under Social Security, but $1,826 under the Alternate Plan.
- A middle-income worker making $51,200 would get about $1,540 monthly from Social Security, but $3,600 from the Alternate Plan.
- And a high-income worker who maxed out on his Social Security contribution every year would receive about $2,500 a month from Social Security compared to $5,000 to $6,000 a month from the Alternate Plan.
In addition to protecting the… government from large debts to retirees, the plans also protect participants from bad markets via the aforementioned minimum interest rates.
- Most plans have written into them a minimum 3.75 percent minimum rate.
- Over the last decade, the accounts have earned between 3.75 percent and 5.75 percent every year, with an average of around 5 percent.
- The 1990s often saw even higher interest rates, from 6.5 percent to 7 percent.
The plans also offer substantially better benefits in other regards, including life and disability insurance that is more comprehensive and easier to access.
Have you heard Hillary trumpeting these statistics in her tirade that Republicans want to “privatize” Social Security?
But, say you, you’re talking about only 3 counties. That is a very small sample. Agreed, say I. So let us turn our attention to an entire country, Chile. One of my personal heroes is Milton Friedman. However, few Americans realize that he also is a national hero in Chile. Thirty plus years ago he was invited to Chile to advise them about privatizing their social security system. They took his advice and did it. Those Chilean politicians must have brought their elderly to ruin and privation!
In 1981 Chile’s social security, a “pay-as-you-go system,” was on the verge of bankruptcy (sound familiar?). The Chilean New Deal is now 30 years old. Time for an accounting! [From, Chile’s privatized Social Security Program is 30 years old, and prospering, by Bob Adelmann] “José Piñera, Secretary of Labor and Pensions under Augusto Pinochet, decided to do a major overhaul of the (Chilean retirement system). (He stated), ‘We knew that cosmetic changes — increasing the retirement age, increasing taxes — would not be enough. We understood that the pay-as-you-go system had a fundamental flaw, one rooted in a false conception of how human beings behave. That flaw was lack of a link between what people put into their pension program and what they take out…. So we decided to go in the other direction, to link benefits to contributions. The money that a worker pays into the system goes into an account that is owned by the worker.’”
“The system still required contributions of 10 percent of salary, but the money was deposited in any one of an array of private investment companies. Upon retirement, the worker had a number of options, including purchasing an annuity for life. Along the way he could track the performance of his account, and increase his contribution (up to 20 percent) if he wanted to retire earlier, or increase his payout at retirement.”
Paraphrasing from Mr. Adelmann’s article, a Chilean retiring at age 65 can expect an annual pension of $70,000. That is nearly 5 times the average $14760 pension currently payed by Social Security. However, the American needs to wait until age 66 to get the $14760. Alternatively, a Chilean can opt for the following. They can retire at age 65 receiving a reduced annual pension of $53,000 but, in addition, collect a one-time cash payment of $223,000. That sum approximately doubles the net worth of the average American. So an average American under a similar privatized system would more than triple their retirement pension compared to our Social Security system and nearly double their entire net worth. We altruists certainly wouldn’t want a system like that!
Now consider for a moment the poor schlep that retires at age 66 and dies of a heart attack the next week. His wife also recently had passed on after working and paying OASDI taxes her entire life. He has three adult children. Every penny of the $500,000 in contributions that he and she dutifully paid into Social Security evaporates into someone else’s pocket. But in a truly privatized system, like Chile’s, his children inherit his pension account. If his wife is still alive, she inherits his account, not just a “survivor benefit.”
My friends, Hillary and the Democrat Party DO NOT have the solutions to our problems.