Moorman and Company

In the recent past, 95 percent of people retiring have relied on their Social Security payments, in one form or another, in order to supplement their retirement incomes. Further, 71 percent of people retiring have had no source of income other than Social Security. If the past is indicative of the future, 71 to 95 percent of the "Baby Boom" generation have a reason to panic.

Just after the turn of the millennium, the 76 million-member Baby Boomers (born 1946-1964) will start collecting Social Security and Medicare. By 2012, Social Security will begin paying out annually more in benefits than it collects in revenues. Raiding the surplus trust fund and replacing the money with government bonds will only work for so long before the government's only choices will be to run a bigger deficit, increase payroll taxes between 30 and 40 percent, or reduce benefits by one-third.

Following the Baby Boomers will be the "X" Generation—children born during the period 1963 through 1981. These X'ers are so suspicious of the government's ability to correct the Social Security problem, they are more likely to believe in UFO's than that they ever will receive a dime in Social Security benefits. With the rate of return for young workers growing steadily worse, most will receive a negative return on their Social Security taxes–benefits equal to less than they paid in.

With all the attention focused on who will, or will not, receive benefits, less attention has been paid to the impact of Social Security on the nation's economy. Virtually everyone agrees that countries that save and invest grow faster and have more rapid improvements in their standards of living. Yet, Social Security's pay-as-you-go financing mechanism reduces national savings, leading to a decline in capital investment, national income and economic growth.

Privatization of our Social Security system is one way to improve growth. Such a system would allow people to invest their Social Security taxes in financial assets such as stocks and bonds. Moving so much capital into private markets would have a significant impact on economic growth.

One proposal to convert social insurance and employer-owned investment accounts has been presented by five members of the President's Advisory Council on Social Security. The first part, amounting to about 5%, would be applied to a standard pension. The next 2.5% would be survivors and disability insurance, still run by the federal government. The final 5% payroll tax would fund Personal Security Accounts (PSA's). These would be individual accounts that workers could invest in stocks, bonds, or other approved investments–rather like today's 401(k) accounts.

This system would be phased in over some 70 years. That would mean that today's retirees and workers aged 55 and over would collect benefits under the current system. The Boomers would get credit for their earnings in the old system, as well as the proceeds of their PSA accounts. The X Generation and future generations would be wholly in the new plan.

The key to this shift in systems is based on the following assumptions: (1) the obligations owed to current beneficiaries will shrink as they age and die, and (2) workers, through the PSA, will have higher returns which, through compounding, will produce much more growth in these private accounts and at a faster pace. The current Social Security Trust Fund earns an equivalent of about 2% annually, after inflation. That's far below the 7% average real return seen on stock market investments over the past 70 years. At that rate the PSA balances will total $14.7 trillion by 2020 and $118.3 trillion by 2045. In contrast, the most recent projections indicate the Social Security Trust Fund would peak at $3 billion in 2018 and would be totally out of money by 2029.

It is clear that this method would possess some risk, but Americans might just need to take some risks if they hope to provide for their future retirement. The American people must go back to basics, consume less and put more away for the future, and continue to encourage better educated workers, for this is the only way to guarantee a bright tomorrow for the U.S. economy and its workers.

The way has been paved by the government of Chile, which faced similar problems in their retirement system in the 1980's. Instead of the usual short-term fixes, they turned to a privately administrated, national system of Pension Savings Accounts. After 15 years of operation, pensions in the new private system are already 50 to 100 percent higher than they were in the state-run system.

Chile was the first nation in the western hemisphere to adopt a social security system, establishing its program in 1924. It also is the first to dismantle a public social security system through privatization. The success of Chile's current system makes it a viable model for U.S. Social Security reform.