Ex-Chief of Social Security Calls for Privatizing Fund : Pension: Conservatives launch drive to replace federal benefits program with plans invested in stocks and bonds.


On the 60th anniversary of Social Security, the biggest and most popular government benefits program, a former chief Social Security administrator helped launch a major conservative drive to convert the program into a private investment fund.

Instead of paying Social Security taxes, workers would place their money into a variety of private plans offering combinations of stocks and bonds, according to the privatization proposal offered Monday by the Cato Institute, an influential conservative think tank with close connections to the Republican leaders of Congress.

Advocates of privatization claim individual workers would get a higher return than is now available under Social Security, which invests payroll taxes in special issues of Treasury securities.

Dorcas Hardy, commissioner of Social Security from 1986 through 1989, joined Tim Penny, a former Minnesota Democratic congressman, at a Cato news conference promoting a radical transformation of Social Security, which has been the core of the modern welfare state.


The country must “develop a system that prevents intergenerational warfare,” said Hardy, maintaining that the retirement trust fund will go broke in 2030, threatening huge tax increases on younger workers to maintain benefits for retirees. “We’ve got a problem in this country and it’s not too early to begin talking about it.”

Any changes would affect only young workers and would be phased in gradually, Hardy said. “This is not about current beneficiaries,” she insisted. There are 43 million Americans receiving monthly benefit checks, including 37.3 million retired workers, spouses and survivors, and 5.7 million disabled people. Cato did not define when it would begin the program, but the presumption is that a new system would apply at first only to workers 30 or younger.

Cato and its conservative allies want to start a national debate, hoping for privatization legislation from Congress within five to seven years, said Michael Tanner, Cato’s director of health and welfare studies.

Created in 1935 during the Great Depression, Social Security depends on payroll taxes from workers to provide benefits for retirees. The system is fatally flawed, the Cato Institute argues, because there will be an excessive burden on future workers to pay for the growing numbers of elderly recipients.


The baby boom generation--those born between 1946 and 1964--will exhaust the trust fund, forcing their children to pay tax rates critics say will go as high as 40%, compared with the current total rate of 15.3% (individuals and their employers each pay 7.65%).

Defenders of the system say it can be maintained in good health through a combination of modest reductions in future benefits, small payroll tax increases and a future increase in the age of full benefits for retirement. The age is now 65, and is scheduled to rise in stages to 67 by the year 2027. Projections show that a further gradual increase to age 70 would ease the financial pressures on the retirement fund.

In addition to retirement benefits, Social Security offers disability protection, and the equivalent of a generous life insurance program for workers. When a worker dies, the spouse and children receive monthly benefits.

The program was signed into law on Aug. 14, 1935, by President Franklin D. Roosevelt, who declared: “We put these payroll contributions there so as to give the contributors a legal, moral and political right to collect their pensions.”

Under the Cato proposal, the system would remain mandatory, but instead of the money going to the federal government, it would be funneled to a private investment fund of the worker’s choice.

In Chile’s privatized system, cited as an example, workers must pay 10% of their salaries, choosing among 20 government-approved private investment funds. On a voluntary basis, Chilean workers can contribute up to 10% more of their income on a tax deductible basis to the retirement funds.

If the U.S. stock market performs in the future as it has in the past, returning an average of at least 10% annually for stocks and 7% for bonds, a worker born in 1970 would enjoy an income of $11,729 a month, according to Cato estimates. Social Security, on the other hand, would pay $1,908 a month.

The long-range return on Treasury bills, in which Social Security payroll taxes are invested, has been about 3.7% a year.


If the market crashed at the time a worker retired, or stock prices were in a prolonged slump, the retirement benefit could be substantially less than expected. Advocates of privatization, however, are confident that the market advantages are so powerful in the long run that their plan will be much more financially rewarding for future workers.