No Second Best: The Unappetizing
Alternatives to Individual Accounts
While proposals for Social Security choice have been much debated, there has been far less discussion of the alternatives. Indeed, opponents of individual accounts often critique these proposals as if those reforms existed in a vacuum. They compare individual account proposals with “current law” and suggest that those proposals will provide lower benefits, or at least lower government-provided benefits. Or they suggest that the costs of transition to a private investment-based system will require tax increases.
But as Charles Blahous, executive director of the President's Commission to Strengthen Social Security, has pointed out, “The essential problem with comparing reform plans with ‘current law’ is that ‘current law’ allows the system to go bankrupt.” 1
Impending bankruptcy is not the only problem facing Social Security. Payroll taxes are already so high that younger workers will receive an extraordinarily poor rate of return. In addition, Social Security contains a host of inequities that penalize working women, minorities, and low-income workers.
Most critics of Social Security choice focus only on insolvency. They implicitly assume that the structure of the current program is fine and changes are needed only in the program's financing. Therefore, the solutions they offer generally do not deal with establishing property rights, making benefits fairer to women or minorities, allowing low-wage workers to accumulate wealth, or even increasing rates of return.
Yet, even judging by their own limited standards, opponents of Social Security choice offer few concrete proposals.
Originally published as Cato Institute Social Security Paper no. 24, January 29, 2002, and updated to reflect current information.