Why It Makes Sense to Privatize Social Security

1. The Social Security system will begin running a deficit in 2018, a deficit that will grow ever larger unless Congress enacts a combination of benefit cuts and tax increases. Retirees will be "taxed" by benefit cuts; workers will be taxed at higher rates to sustain those reduced benefits.

2. Why is there a looming crisis in Social Security? Social security taxes yield an effective return of about 3%, and that return will diminish as the ratio of workers paying taxes to workers receiving benefits declines.

3. A worker who makes $40,000 a year (in 2004 dollars), for example, will receive about $15,000 a year in Social Security benefits if he retires in 2018 at age 66. Workers who make the same amount but retire later will receive less than $15,000 a year (unless those then working pay higher taxes).

4. If a worker making $40,000 a year had been allowed to invest his taxes (including the so-called employer's share) in a strong instrument (e.g., AAA corporate bonds) he would receive an income of more than $30,000 a year beginning in 2018, even if he had paid income taxes on the interest he earned. Moreover, he would be able to draw a larger income every year as a hedge against inflation.

5. What about the transition from the present system to a private system? Who will pay current retirees and those who retire having worked under both systems. Simple: Guarantee that every worker will receive at least as much as he would have under the present system, then collect just enough Social Security tax to meet that guarantee. That tax would diminish over time until all retirees are covered by private accounts. (Those who can't afford to pay the residual Social Security tax in addition to investing in their private accounts would be allowed to tap their private accounts to pay the tax.)

6. At the end of the transition, the government will no longer have a liability on its hands and every worker will be far better off than under the present system.