Government Spending

Social Security is not an asset

Geoffrey Lawrence

Imagine for a second that your dreams of financial security in retirement are entirely within your reach. Now imagine that the government forces you to participate in its poorly designed retirement system, depriving you of those dreams.

Now you're beginning to understand how the Social Security system works.

Regardless of any altruistic motives that may have existed when the Social Security Act became law in 1935, it's hard to imagine a less effective means of providing for seniors during retirement than through the current Social Security system.

This goes far beyond concerns over the system's pending insolvency. Sure, the Social Security system will experience a negative cash flow this year and will do so permanently after 2014. Under optimistic assumptions, the system will be insolvent by 2037.

Even aside from that, and even at full solvency, the system yields an inordinately small rate of return for beneficiaries. Social security payments are calculated based on wages. As the Cato Institute's William Shipman points out, wages increase by only about 1.5 percent per annum, on average, and so Social Security benefits increase at a roughly similar rate.

At such low rates of return, workers are deprived of the quality of retirement that they otherwise could enjoy if permitted to invest their retirement savings in the capital markets. If Social Security administrators were the financial planners for your personal retirement account and earned only a 1.5 percent rate of return, you would fire them!

The bigger problem with Social Security, however, is that your claim to retirement benefits is not a right. For all the contributions you pay into the system, you own nothing. Should you die before receiving any benefits, you have no heritable assets to pass on to your loved ones. The Supreme Court has declared that Congress can arbitrarily downgrade your benefits payments at will — meaning you have no enforceable property rights over your claim to retirement income. 

Recognition of this problem has led to calls for partial privatization, which would divert a portion of the 12.4 percent Social Security payroll tax into individual accounts. Out of those accounts, workers could invest in tangible assets such as stocks or bonds. Chile instituted such a reform to its national pension system in 1981 that has since become an international model for pension reform. In addition to producing higher living standards for retirees, Chile's pension reform also led to increases in capital formation — particularly among lower- and middle-income workers. As a result, total economic productivity increased as personal savings were channeled toward investments yielding market-driven interest rates.

Without a doubt, Chilean-style pension reform in the United States could lead to higher living standards for seniors and faster overall economic growth. It would also provide workers with the security of owning tangible, heritable assets that are not subject to political winds in Washington.

Opponents of Social Security reform, such as Senator Harry Reid, have little intellectual ground to stand upon and so have resorted to scaremongering. 

"I believe that retirement security for Main Street should be guaranteed, not trusted to Wall Street," Reid said recently. The pending insolvency of the Social Security system means those benefits are anything but guaranteed. However, it is reasonable to have concerns about temporary fluctuations in the stock market — at least until one considers the dismal rates of return offered by the Social Security system itself.

Andrew Biggs of the American Enterprise Institute has shown that, if a worker had been allowed to divert only 4 percent out of the 12.4 percent payroll tax into an individual account earning a market interest rate from 1965 to 2008 — retiring immediately after the 2008 stock market crash — that worker would have received benefits payments 15 percent higher than a worker with a traditional Social Security account.

Social Security is simply a bad deal, independent of one's political persuasion. Almost no one would participate in the system if he or she had a choice. In fact, it's telling that state and local government workers in Nevada and most other states opt out of the system in favor of the state's Public Employees' Retirement System. Social Security is a government program so good that government workers won't even participate in it!

In Nevada, Harry Reid has ruthlessly attacked his opponent, Sharron Angle, for supporting Chilean-style pension reform. Yet Angle's plan would move Social Security toward sound footing while allowing workers to acquire assets and realize higher rates of return. 

Reid is defending an insolvent status quo that will inexorably lead to benefits reductions, massive tax increases — or both.

Geoffrey Lawrence is a fiscal policy analyst at the Nevada Policy Research Institute. For more information visit http://npri.org.

Geoffrey Lawrence

Geoffrey Lawrence

Director of Research

Geoffrey Lawrence is director of research at Nevada Policy.

Lawrence has broad experience as a financial executive in the public and private sectors and as a think tank analyst. Lawrence has been Chief Financial Officer of several growth-stage and publicly traded manufacturing companies and managed all financial reporting, internal control, and external compliance efforts with regulatory agencies including the U.S. Securities and Exchange Commission.  Lawrence has also served as the senior appointee to the Nevada State Controller’s Office, where he oversaw the state’s external financial reporting, covering nearly $10 billion in annual transactions. During each year of Lawrence’s tenure, the state received the Certificate of Achievement for Excellence in Financial Reporting Award from the Government Finance Officers’ Association.

From 2008 to 2014, Lawrence was director of research and legislative affairs at Nevada Policy and helped the institute develop its platform of ideas to advance and defend a free society.  Lawrence has also written for the Cato Institute and the Heritage Foundation, with particular expertise in state budgets and labor economics.  He was delighted at the opportunity to return to Nevada Policy in 2022 while concurrently serving as research director at the Reason Foundation.

Lawrence holds an M.A. in international economics from American University in Washington, D.C., an M.S. and a B.S. in accounting from Western Governors University, and a B.A. in international relations from the University of North Carolina at Pembroke.  He lives in Las Vegas with his beautiful wife, Jenna, and their two kids, Carson Hayek and Sage Aynne.