The “Personal Account” Path to Ending Social Security

Social Security is unjust, immoral, and un-American. It is a violation of individual rights. It should be phased out and ended. The question is how to do it.

Ending Social Security is not the problem, legally speaking. Benefits are not guaranteed, no matter how much or for how long one has paid in to the system. Congress can simply end all SS taxes, stop paying current benefits, and rescind all future benefit promises in a simple, sweeping legislative action. Of course, this would be cruel, since Social Security is so deeply entwined in people’s financial lives. No one in his or her right mind would advocate such a draconian step. The problem is finding the most equitable plan; one that protects the promises given to those currently in the system; is politically feasible today; and spreads the cost of funding those promises fairly during the phase-out period.

While it would be best to simply let new entrants into the workforce keep their 12.4% SS “contribution” while finding other sources of revenue to make up the shortfall needed to pay promised benefits, that approach is simply not feasible. Getting the political support for ending Social Security in a single plan, it must be acknowledged, is a political pipe dream. If we who advocate individual freedom hang our hats on that all-or-nothing political approach, rejecting incrementalism, we cede control of the debate to those whose goal is to “fix” Social Security in perpetuity.

Personal accounts are a politically necessary medium-term political compromise because the country is not ready to abandon the notion that the government must ensure some level of retirement security for every worker. Personal accounts would be a much easier “sell” than complete one-step abolition, while setting us on a longer-term path toward ending Social Security. The argument is simple: The politicians have had their chance at managing our retirement money, and have failed. They’ve brought America to the brink of national bankruptcy, rather than ensure our retirements. Personal accounts give financial control to the individuals who earned the money, rather than political money launderers who didn’t.

I do not support private accounts along the lines of President Bush’s meager 2-4% of the 12.4% total SS tax. Nor do I support accounts controlled by the government. Like my plan for tax credits for education, privatization must be tailored so as to act as a transitionary vehicle toward a complete phase-out. Mandatory accounts controlled by politicians would be far worse than the current system. It would give government, as a shareholder, commensurate control over private business.

Current proposals for personal accounts that I am aware of are presented as ends in themselves, and leave government in control of the money (with very limited choice for individuals). This I reject. I advocate only a plan that unequivocally advances freedom—albeit incrementally—until the system is completely abolished. This is both a practical and a moral necessity.

For sure, private accounts within SS are government-enforced savings, and thus a violation of individual rights. But what we have today is forced redistribution backed only by hollow promises of old-age benefits, rescindable at any time by congress. My plan would redirect existing SS taxes from Congress to the individual that earned it. It would not add one dollar of additional taxation, nor would it be an added program of forced savings layered onto the status quo. Yes, the same dollars would be taken by force. But at least the taxpayer would have possession of, and a right to, his/her own money, rather than the politicians. I consider SS personal accounts to be a step toward individual rights, especially property rights - preferably without, but even with, minimal investment controls (more on that later). They can be advocated as a step in the phase-out process.

My plan would work as follows:

1. 1.       All new entrants into the workforce would have his/her entire 12.4% payroll tax (employer “contribution” included) automatically deposited into a self-directed IRA or 401k type account in the depositor’s own name.
2.  2.       All current workers would be given the choice of opting into the private accounts, or staying with the current system. Those who opt into the private accounts would have all of their previous SS taxes returned to them in a lump sum, and deposited into their new personal accounts.
3.  3.       Those currently collecting benefits would see no change. The current schedule of benefits would continue until death.
4.  4.       The shortfall in revenues created by shifting moneys previously earmarked for current benefit payouts into the personal accounts would be made up by floating government bonds, reduced spending elsewhere, a temporary across-the-board income tax surcharge, or a combination of the three.

Point one: This would be mandatory. Once again this step is a political necessity. But it would advance us toward more liberty because it would re-establish the principle of property rights. The money would be the individual’s and the individual’s alone, to draw on in retirement as he pleases. The personal accounts could be set up like Individual Retirement Accounts, including the entire range of investment options now available for such accounts.  The owner would designate beneficiaries, so that any money left in the account after his death can be passed on in the form of inheritance. Not a dollar of it would fall into the hands of politicians.

Point two: This is self-explanatory, but fair, I believe. Each worker would calculate the relative benefits of each approach as it relates to his personal circumstances. Leaving the current system would obviously benefit workers farthest from retirement, but it would be their choice.

Point three: Simple fairness requires promises to be kept. See my post, The Social Security Injustice.

Point four: One of the biggest clouds hanging over the financial future of this country is the huge unfunded liability created by Congress’s over-promising of benefits under the current set-up. This cloud would immediately begin to shrink under points one and two, coupled with the continuing die-off of current beneficiaries. The increased need for alternative revenue sources as younger workers pull out of the system would be offset by the surge in national savings as the personal accounts begin to grow.

This would also be much fairer. Simply phasing out Social security benefits and taxes would leave wage and salary workers holding a huge bag. They would have incurred the entire cost of honoring current promises through years or decades of slowly falling SS taxes, with nothing to show for it in the end. On the other hand, under my plan, the cost would be more broadly borne through income taxes. For example, retirees on Social Security would help pay the costs, since most SS benefits are subject to income tax.

Over time, the Social Security System would increasingly be made up of personal accounts, ending the sinister charade of tying current benefits to current workers’ taxes. Eventually, as personal account holders grow into a majority, it would be an easy step to make the case for making Social Security voluntary, effectively ending the program. 

To get started toward that goal, let us declare that the politicians have had their chance at managing our retirement money, and have failed. They have over-promised benefits, creating tens of trillions of dollars in unfunded liabilities, putting in jeopardy the promised benefits of today’s taxpayers. This same irresponsible “generosity” threatens economically ruinous tax hikes and/or inflation. Washington has back-stabbed us with our own money. It’s time to turn management of our money back over to the people to whom it rightfully, logically, and morally belongs—the people who earned the money in the first place. Let us begin with personal accounts.

Related Reading:

Social Security and the "Hypocracy" Charge

The Social Security Injustice