Peter Ferrara at The Heartland Institute presents a way for the federal government to transition Social Security from a pay-as-you-go system to one of personal accounts owned by each worker. The policy brief is entitled: Social Security Personal Accounts: Prosperity for All. Ferrara’s suggestion is relevant in the wake of the bankruptcy filing in Detroit and the likelihood that many other state and municipal governments will do the same in the coming months.
This proposal is not an untried theory—Chile implemented personal retirement accounts in the early 1980s. Within eighteen months 93 percent of Chilean worker signed up for the new personal accounts.
The system proposed by Ferrara is based on legislation introduced by Rep. Paul Ryan and then Sen. John Sununu in 2005. According to Ferrara some benefits include:
- Each worker can choose their own retirement age;
- Accounts would offer higher rates of return than the current system;
- Lower payroll taxes down the road;
- Higher long-term economic growth;
- Individuals can opt out and remain in the current system;
- Chief actuary of the SSA says the plan would achieve long-term solvency.
If the benefits outlined by Ferrara hold true this plan should appeal to most (reasonable) Democrats and Republicans. The appeal to the former is the federal government is still involved in requiring universal participation and guaranteeing a minimum level of retirement income; for the latter it would mean eventual lower taxes and smaller federal expenditures.
In Washington, the status quo is king. Politicians have tried and failed in the past to make substantial reforms to the so-called ‘third rail’ of politics. Maybe Detroit’s demise will change this. Ferrara’s analysis offers a good starting point for the reform debate.