| Social Security: The Debate Over Privatization
Olivia S. Mitchell, Ph.D.
J. Mark Iwry, J.D.
Two Social Security experts differed on the potential benefits of private investment accounts, but agreed that Social Security's problems must be addressed. Doing so now, according to Olivia Mitchell and Mark Iwry, would be much easier than waiting for the system to become insolvent.
“Social Security as currently designed is not sustainable,” according to Mitchell, a member of President Bush's Commission to Strengthen Social Security. She predicted that if the system's problems are left unaddressed, cuts in benefits or increases in taxes “are inevitable. And every year we wait only makes this problem worse.”
Social Security is typically described, Mitchell noted, as part of the three-legged stool: private savings, employer-provided pensions and Social Security. However, the poorest Americans rely much more on Social Security than do wealthier individuals. Today, half of all Americans are not covered by an employment-based retirement program. As a result, a growing number of people do not have nearly enough savings to take care of their retirement needs.
Mitchell said there are two major types of change to consider:
• Move to a “pure welfare” program, one that could include means testing benefits.
• Move to a funded program, with government trust funds invested in the capital markets and allowing individuals to establish personal retirement accounts.
Personal retirement accounts, a concept she supports, would be collected centrally, as is currently the case. The concept would include benefits that could be divided in divorce. Preretirement withdrawals would be prohibited. Such personal accounts, Mitchell said, would not make Social Security solvent.
 Mark Iwry also stressed the need to address Social Security's long-term funding problems, but held a different position on private investment accounts. “I'm all for them, but we already have them,” he observed. “I just believe that we already have private investment accounts,” Iwry said. “We've got 401(k)s, 457s, and 403(b)s.”
He also questioned why we would “want to replace the nation's best defined benefit plan with personal accounts.” The current plan has several laudable attributes, which he reviewed.
By comparison, he noted that private accounts create many problems, primarily because they would divert funds from Social Security, undermining the program's fiscal solvency. These accounts also would carry billions of dollars in transition costs that, he stressed, “would have to be financed by increased government borrowing—if not higher taxes.” Another consequence of private accounts could be the weakening of private pensions. “Would added employer costs encourage employers to drop or cut back plans?” Iwry asked. “Would employees reduce their 401(k) contributions?”
Instead he proposed several ways of building on existing personal investment accounts, such as capitalizing on the power of matching contributions and tying benefits to what people save, rather than on what they earn. “We could do a lot to make it easier for the average American to save and to save more automatically,” Iwry said.
Olivia Mitchell is the International Foundation of Employee Benefit Plans Professor of Insurance and Risk Management, and the Executive Director of the Pension Research Council, at the Wharton School of the University of Pennsylvania.
Mark Iwry , a nonresident senior fellow at the Brookings Institution, was the benefits tax counsel at the U.S. Treasury Department. He currently serves as Senior Adviser to the Retirement Security Project and practices law with the firm of Sullivan & Cromwell.
|
