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!