Fixing, Privatizing, Replacing Social Security

Replace Social Security with American Birthright Accounts

GEORGE NOGA
OCT 15, 2023

This post analyzes three alternatives for Social Security: (1) fixing it; (2) privatizing it: and (3) replacing it with American Birthright Accounts, or ABAs. This post is a tour de force about Social Security and almost everyone will be surprised by what follows.

Fixing Social Security

Contrary to most beliefs, fixing Social Security (“SS”) is not rocket science. The following measures should bring SS into long-term balance.

Gradually increase the full retirement age to 70 and the early retirement age to 65. Life expectancy has increased by 15 years since SS was first enacted.
Index the full and early retirement ages to future increases in life expectancy.
Change the index used for COLAs. The current index is based on wages and not costs. This change saves 1% each year – a humongous amount over many years.
Make COLAs one percentage point less than the index until SS is in balance.
Consider means testing benefits. I oppose this, but it may be necessary politically. Either way, this will not make much of a difference in the numbers.

All these measures will be implemented eventually because there are no other choices. Similarly, Medicare will be converted to a premium support model and Medicaid will be block granted to the states. Once again, there simply are no other viable options.

Privatizing Social Security

This option is better than fixing SS but – as you soon will see – is not as good as American Birthright Accounts. The main points about privatizing SS are:

Each person can choose between receiving current SS or a private account.
Privatization would be offered only to persons aged 55 or younger.
Funds would be invested in professionally managed and diversified global index funds and would not be accessible to beneficiaries until after retirement.
Estimating the one-time (gradual) transition cost is dicey; the last reliable estimate was $1 trillion and that was many years ago.¹ Even if the cost has increased to $2 trillion, privatization is worthwhile. That is equal to only one year of 2023 federal deficits – for which we have little or nothing to show.
The return on private accounts would be much higher than the 1.2% on SS.
Everyone owns his private account; the value of a median SS account is $400,000 to $500,000 at retirement – double that for a family with two wage-earners.
Private SS accounts are personal property just like any other asset. In a family with 2 wage-earners, nearly $1 million could be passed on to heirs.

Privatization is a light year better than fixing SS. The main criticism levelled by critics is private accounts are too risky. Barack Obama (following the stock market plunge of 58% in 2007-2009) said of George W. Bush’s 2005 plan to partially privatize SS:

“If (Bush) had his way, millions of Americans would have had Social Security tied to the stock market; they would have watched as their nest egg disappeared before their eyes.”

Fortunately, a study was done by the AEI² and published by Forbes Magazine³ that debunked Obama’s economic illiteracy. The Biggs study ran 100 simulations, and the worst case was that a worker, who began a private account at the very worst time, would have seen benefits reduced by less than 1% compared to SS. However, that same worker would have come out far ahead by virtue of ownership of the account.

Replacing Social Security with ABAs

I created the concept of American Birthright Accounts and first posted about it 5 years ago. ABAs could make every child born in the USA an after-tax millionaire at retirement and in today’s dollars. I am not flooding you with numbers, but all the proper computations have been made. ABAs would operate as follows:

At birth every child receives a professionally managed and diversified tax-fee account invested in global index funds funded by the government for $5,000.
Neither ABA beneficiaries nor employers are required to use their own funds.
An additional $500 per year until retirement would be added by government.
The account grows an average of 6% to 7% annually net of inflation. This is in line with the performance of markets over the past 100 years.
Prior to the full SS retirement age, the account will grow to over $1 million.
The account owner draws $5,000 per month tax-free upon retirement, $10,000 for a two-person household. This is equivalent to $150,000 per year taxable.
A couple could bequeath $2 million or more to their children or heirs.
The cost to the government is an infinitesimal part of the federal budget.⁴

ABAs compared to Social Security

A worker on Social Security earning the median income receives a real return of 1.2%. Upon retirement, the worker gets $13,000 per year after tax. Upon death there is nothing remaining. A person has to work many years to qualify for benefits.

The beneficiary of an ABA account has an entitlement by virtue of birthright, whether or not part of the workforce. Upon retirement everyone draws $60,000 per year tax-free and there is over $1 million remaining to leave to their heirs.

The power of markets versus the torpor of government

Aside from the breathtaking financial benefits of ABAs versus SS, there are profound social benefits. ABAs enable all Americans to participate in future global wealth generation and go a long way toward eliminating inequality. ABAs succeed due to the power of markets while SS fails due to the fecklessness of government.

ABAs would turn workers into nascent capitalists and give them a huge stake in the market economy. Progressives oppose privatizing SS precisely for that same reason, i.e. fear of turning workers into free-market capitalists. They don’t want to make everyone rich because it doesn’t comport with their nihilistic class warfare mantra.

The creation of American Birthright Accounts would be the most transformative economic legislation in US history, even eclipsing the Homestead Act of 1868 that made landowners out of working-class Americans. It would give a new and profound meaning to the words: Born in the USA!

1 – Estimate published by The Heritage Foundation

2 – American Enterprise Institute by Andrew Biggs, a resident scholar and former deputy commissioner of the Social Security Administration

3 – Forbes Magazine edition of April 13, 2009

4 – There were 3,661,000 US live births in 2022. Allowing for premature deaths, there would be 3.2 million new ABA beneficiaries. At $5,000 per account, it would cost $16 billion – equal to three-tenths of one percent of federal spending. The $500 per year varies with the number of accounts but at its maximum (in 64 years) would be $100 billion, or 1.8% of federal spending in 2023 dollars.

© 2023 George Noga
More Liberty – Less Government, Post Office Box 916381
Longwood, FL 32791-6381, Email: mllg@cfl.rr.com

Private Social Security benefits everyone at all times – even when markets melt down.

The best way to minimize inequality . . .

Privatize Social Security Immediately

By: George Noga – September 12, 2021

With one stroke, government could virtually eliminate wealth inequality and most income inequality. Economists calculate the current Social Security program yields about 1% per year and when the beneficiary dies his/her heirs get absolutely nothing. In recent decades, private accounts invested in balanced index funds have returned 7% net of inflation; moreover, when the beneficiary dies the heirs inherit a fortune.

To illustrate, $100,000 compounded at 1% for 35 years results in

$140,000; compounded at 7%, it yields over one million dollars.

George W. Bush proposed privatization but progressives demagogued it mercilessly. Barack Obama said, “If Bush had his way, millions of Americans would have had their Social Security tied to the stock market; their nest eggs would have disappeared before their eyes.” Obama demonstrated his economic ignorance. Forbes magazine published a study by the American Enterprise Institute (AEI) written by a former commissioner of the Social Security Administration; the study proved that privatization is beneficial even if initiated right before the stock market plummets by 54% as in 2007-2009.

Under the Bush plan, only workers under age 55 were eligible for private accounts and no retiree could possibly have lost money. The absolute worst case in the AEI study was for a worker who started a private account in 1990 at age 53. That worker would have received benefits seven-tenths of one percent less that Social Security. However, the worker would still have come out way ahead because he owned the account. Even when markets melt down 54% at the worst possible time, private accounts are better.

American Birthright Accounts

The best plan is to replace Social Security with America Birthright Accounts or ABAs. We at MLLG invented the ABA concept and published it in in our posts of 5/20/18 and 6/17/18. These are easily available on our website: www.mllg.us. Following is a summary of American Birthright Accounts as we first proposed them three years ago.

Government creates a tax-free ABA at birth for every child born in America and funds it for $5,000. Each year until retirement, government adds $500. The account is professionally invested in a diversified portfolio of global index funds. Since 1930 markets have increased 7% yearly net of inflation and despite meltdowns. When the ABA beneficiary is age 65, the account exceeds $1 million and generates $6,000+ per month tax-free and in today’s dollars. A retired couple, both with ABAs, receives $150,000 per year tax-free and would have $2+ million to bequeath to heirs.

American Birthright Accounts make every American a millionaire

ABAs are affordable. There were 3.6 million births in the USA in 2020 – about 3.5 million net of early mortality. This equates to an annual cost of $17.5 billion for the initial $5,000 and $1.75 billion for the $500 per year. The average cost for the first 10 years is $25 billion per year; in year 11 the cost is $35 billion and increases by $1.75 billion every year thereafter. This is less than one-half of one percent of the budget.

Private Social Security and ABAs Minimize Inequality

Creating ABA accounts, or even privatizing Social Security, would go far in eliminating inequality in America. It would make all Americans stakeholders in our market economy. Private accounts succeed due to the power of markets whereas Social Security fails because of the evils of government. Progressives oppose making everyone rich because it would eliminate their dependence on government.

ABAs would cost $250 billion over the first 10 years and easily would fit into the infrastructure bills now proposed by progressives. It would cost a mere 5.5% of the $4.5 trillion and it would give an entirely new meaning to “Born in the USA“.

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Our next post is about all the new taxes in your future – thanks to Biden.

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