The issue of Social Security reform has arguably been the most talked about and debated public policy issue of the recent past. Most people think that something must be done if we wish to keep the program from going bankrupt, but what?

A recent article in the Brookings Review (Summer, 1998) looked at the results from a number of surveys to draw conclusions about the public's attitudes toward the program.

What can be done?

Raise Social Security payroll taxes?

Only 40% favor raising taxes or eliminating the high income cut-off to cover the shortfall.

Only 25% favor taxing benefits, and only 20% favor reducing benefits.

This option is often put forth as a magic bullet cure to the problem. If we can somehow get the money from Social Security taxes into the stock market we can tap into a new source of income. (There are of course many potential problems with this option, see Social Security Reform Readings for the pros and cons of privatization.)

As the table below shows, there appears to be much more support for letting individuals make their investment decisions. The numbers also show that investment in stocks by the government is not supported.
 

Summary

One striking observation from the survey responses is that there appears to be much less support for investing in the stock market once it is acknowledged that the returns to the investments, and hence individual benefits, may be low if the market - or the investor - does poorly.

This raises one of the most sticky parts of the individual-decision privatization movement. If the stock market as a whole does poorly will there be a guarantee of a minimum benefit? If not, are we willing to let those who happened to make poor investment decisions suffer low benefits in old age?

On the other hand if there were a minimum benefit, we may end up with another savings-and-loan-type bailout since people will have an incentive to make extremely risky investments knowing that there is no real down side. If these risky investments fail - will we willing to bailout these "reckless" investors?

Historically, the stock market has outperformed bonds; however, it is still necessary to spell out exactly what would be done if there is a market downturn that results in low benefits for some retirees. We also need to figure out how to treat that investor who put their Social Security money into a risky venture which then failed. In my opinion, privatization proposals are incomplete without these contingencies explicitly spelled out.

Links:

• The Brookings Review
• Social Security Reform Readings

The issue of Social Security reform has arguably been the most talked about and debated public policy issue of the... | Posted June 30, 1998 12:36 AM by John Irons