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February 2012 Published by:

Freedom and Prosperity for American Workers
By Peter Ferrara*
SUMMARY According to the government’s own reports, Social Security is on a path to fiscal ruin. With a rapidly aging Baby Boom population and lackluster growth in the number of workers to support them, massive benefit cuts and/or tax increases are coming in the not-so-distant future for the program unless it can be significantly restructured. However, payroll taxes financing the program are already quite high and cutting benefits would make what already turns out to be a bad deal for workers even worse. The solution is to allow each worker the freedom to divert their payroll taxes into a personal savings account, as adopted in Chile so successfully 30 years ago. Social Security’s official actuaries have already estimated that such a proposal would achieve full solvency for the program. Moreover, through personal accounts workers could earn full, standard, long-term market investment returns which would significantly outpace the current returns workers are promised in the Social Security program (let alone what it will actually be able to pay given its troubled finances). Adopting such accounts would result in the largest reduction in government spending and the largest tax cut in world history.

Social Security Reform:

Social Security’s Current Structure

Social Security with Personal Savings Accounts

Workers see payroll taxes take a big chunk out of every paycheck. Those funds are then funneled through Washington to pay for current retirees’ benefits. It’s a pay-as-you-go system that for decades has counted on fewer and fewer workers to pay for each retiree.

Workers have the choice to put all (or a portion) of those same payroll taxes into a savings account that they own and control, allowing them to accumulate wealth over the years and fund their own retirement.

*Peter Ferrara is Director of Entitlement and Budget Policy at the Heartland Institute and General Counsel of the American Civil Rights Union. He served in the White House Office of Policy Development under President Reagan and as Associate Deputy Attorney General under President George H.W. Bush. He is a columnist at and, and author of America’s Ticking Bankruptcy Bomb (HarperCollins, 2011).

Introduction: What Is Social Security and How Does It Work? Social Security was created in 1935 to provide a floor of income for seniors, survivors, and the disabled. It has two parts. When we think of Social Security, we usually think of the Old Age and Survivors Insurance (OASI) program, which provides monthly checks to seniors in retirement. OASI’s full retirement age is currently 66 and rises to 67 for those born in 1960 or later.1 There is also the Social Security Disability Insurance (SSDI) program, which provides supplemental income to people who are unable to work, usually due to a physical disability. Social Security is the single largest expenditure in the federal budget, costing taxpayers over $730 billion in fiscal year 2011 and consuming over 20 percent of the entire budget.2

Entitlement Spending in the Federal Budget, 2011




Social Security



Other Federal Spending

Social Security is funded primarily with payroll taxes, the Federal Insurance Contributions Act (FICA) taxes coming out of every worker’s paycheck. That tax started in 1937 at a 1 percent rate paid by the employer and a 1 percent rate paid by the employee on the first $3,000 of wages earned by a worker each year. Today the rate is a combined 12.4 percent, with 6.2 percent paid by the employer and 6.2 percent paid by the employee on the first $110,100 of wages earned each year.3 In 2011 and 2012, Congress temporarily reduced the employee’s portion of the tax to a 4.2 percent rate. FICA taxes collected from current workers pay for the benefits of current retirees and disabled individuals – known as a “pay-as-you-go” system. Surplus taxes are put into the OASDI Trust Fund. There are two important points to consider about this financing structure. First, the common belief that taxes paid by today’s workers are saved and invested by Social Security to finance the future benefits of those same workers is simply not true. Instead, taxes paid by today’s workers are immediately paid out to finance the benefits of today’s retirees – a tax and redistribution system rather than savings and investment.4 Second, for many years Social Security had annual surpluses – more money was coming in through payroll taxes than was being paid out for Social Security benefits. Over the years, the OASDI Trust Fund has built up over $2.6 trillion in these surpluses.5


ever, another common belief, that the Social Security Administration has these surpluses sitting in a secure account or invested somewhere to take in additional earnings (as most pension plans do), is also untrue. In fact, the surpluses were lent to other parts of the federal government to be spent on general federal expenditures – everything from foreign aid to bridges to nowhere. In return, the OASDI Trust Fund received special-issue Treasury bonds, government IOUs that presumably could be turned in for cash when needed to pay benefits in the future. But as the Clinton administration explained a decade ago, this is nothing more than a bookkeeping fiction:
These [Trust Fund] balances are available to finance future benefit payments and other Trust Fund expenditures—but only in a bookkeeping sense. These funds are not set up to be pension funds, like the funds of private pension plans. They do not consist of real economic assets that can be drawn down in the future to fund benefits. Instead, they are claims on the Treasury that, when redeemed, will have to be financed by raising taxes, borrowing from the public, or reducing benefits or other expenditures. The existence of large Trust Fund balances, therefore, does not, by itself, have any impact on the Government’s ability to pay benefits.6

That’s $18 trillion of promises made to the American people that cannot be kept unless we hike taxes, cut benefits, or increase the federal debt even further.

Because Congress has spent every penny of the $2.6 trillion in Social Security “surplus,” it is now considered debt that the government owes to itself—which is why the Trust Fund is actually counted as a part of our $15 trillion national debt. What’s worse, the Supreme Court has already ruled that individuals have no property rights in the future payments from Social Security.7 In other words, those “obligations” to beneficiaries don’t even really exist. So long as Social Security was running surpluses, this accounting fantasy could be conveniently ignored. But the situation is much different today. Social Security’s Insolvency Social Security’s insolvency is not far off into the future as some would suggest. It’s here today. In 2010, for the first time since the early 1980s, Social Security ran a cash deficit – meaning that payroll tax revenues coming in were not enough to cover benefits being paid out. The Trust Fund, that bookkeeping fiction, will begin to be depleted rapidly in 2023 and is projected to run out of money by 2036. Looking further into the future, Social Security faces total unfunded liabilities of nearly $18 trillion.8 That’s $18 trillion of promises made to the American people that cannot be kept unless we hike taxes, cut benefits, increase the federal debt even further, or inflate it away – a huge drag on the American economy, a huge disappointment to future retirees, or a huge burden on our children and grandchildren. The main reason we are seeing these problems now is that demographic trends have exposed major flaws in the program’s design. Using contributions from today’s workers to pay for today’s retirees worked well 60 years ago when there were 16 workers paying in for every retiree taking out benefits. But today there are more retirees, people are living longer, and the labor force is shrinking. The first of 79 million people from the Baby Boom generation hit retirement age last year, with only 66 million people in the generation behind them to pay their benefits. When Social Security was created, life expectancy was just over 60 years. Today it is 78,9 and when people live longer their retirements tend to be longer as well, requiring more benefits to be paid out. The labor force participation rate is at its lowest level in nearly 20 years, meaning a lower percentage of people are generating wages subject to the payroll tax.10


Number of American Workers per OASDI Beneficiary
18 16 14 12 10 8 6 4 2 0 1950 1970 1990 2010





2030* * = Projected

Source: SSA Data

As a result, that 16-to-1 ratio of current workers to retirees has fallen to 3-to-1 and will continue to fall further in the coming years.11 In short, the “pay-as-you-go” model is simply not sustainable given these demographic pressures. Social Security Is a Bad Deal for Working People Today In addition to being headed for fiscal disaster, Social Security in its current form also turns out to be a bad deal for workers. If Social Security payroll tax contributions were saved and invested to pay for future retirement benefits, like in a typical retirement system, those payments would earn investment returns that could accumulate to huge amounts over a lifetime. But as we saw above, this is not actually what happens. Instead of saving and investing workers’ payroll tax contributions, Congress spends every penny on current beneficiaries (or, in the days when there used to be surpluses, on their own pet projects). The system can only pay a return to workers using the meager interest payments on the Trust Fund’s government IOUs (interest payments that come out of taxpayers’ pockets anyways) or if payroll tax revenues grow over the years. According to the Social Security Administration’s own estimates, a typical worker’s payroll tax contributions will come back to them with returns of just 2 to 3 percent in retirement. The deal gets even worse for young people (who will see returns of only about 1.5 percent) and higher earners (who will receive near zero returns over a lifetime).12 However, independent evaluations have found even those dismal estimates to be much too rosy, not reflecting the experience of real families. For most workers today, even if Social Security does somehow manage to pay the promised benefits that it cannot currently afford, those benefits would represent a real rate of return of just 1 to 1.5 percent or less. For many, the return would be zero, or even negative.13 Compare this to returns that workers could receive if they had the freedom to invest their payroll tax contributions in stocks or bonds instead. In his definitive book Stocks for the Long Run, Wharton Professor Jeremy Siegel shows that the long-run real return on corporate stocks is about 6.8 percent, with a remarkable consistency over more than 200 years.14 Corporate bonds offer a slightly lower return in exchange for less risk than stocks, earning about a 4 to 5 percent return on average over time.15 U.S. government securities such as T-Bills or Treasury bonds have the lowest returns—about 1 to 2


percent on average in the post-war period—but offer unparalleled security as an option for investors unwilling to stomach any risk.16 And as we’ll see in a section below, even despite the recent financial crisis and the big associated market losses, returns on investments in these markets still come out ahead of what Social Security promises. Markets go up and down, of course, and there is undoubtedly risk in investing. Nothing is guaranteed. But if historical trends continue, compounding the much higher returns on stocks and bonds over a lifetime adds up to an enormous difference when compared to the much lower returns offered by Social Security’s pay-as-you-go, tax and redistribution system. To illustrate, let’s examine the case of a typical two-earner household, a husband and wife where both earn the average income for full-time male and female workers. Let’s be more specific and say that they each entered the workforce in 1985 at age 22 and they have two children. Now suppose they could save and invest the payroll taxes that would otherwise go into Social Security in their own personal investment account over their entire lives. Suppose funds are set aside each year to buy private life and disability insurance that would pay at least the same survivors and disability benefits as Social Security promises. The rest of their funds are saved and invested each year in a diversified portfolio of stocks and bonds and earn a conservative real return on average of 5 percent per year. What would the results be? This average-income family would reach retirement with a personal account fund of $1,223,602 in today’s dollars, after adjusting for inflation. Out of the continuing investment returns alone that fund would be able to pay about twice what Social Security promises to pay them under current law, while still allowing them to leave the entire $1.2 million fund to their children. Or they could use the fund to buy themselves an annuity that would pay them over four times what Social Security currently promises (let alone what it will actually be able to pay).17 Keep in mind that Social Security’s finances are quickly deteriorating. If the government raises payroll taxes, cuts benefits, or does some combination of both in order to fix these problems, then the effective rate of return under Social Security will fall even further for all workers across the board—increasing the gap between Social Security’s low returns and the much higher returns workers can receive with the freedom to invest their money as they see fit in the market. Personal Accounts for Social Security Thankfully, there is a better way. Workers could be empowered with a choice: they could stay with the tax-and-benefit system of Social Security as it is currently structured, or they could take some or all of the payroll tax contributions that they and their employer currently pay and instead save and invest them through a personal savings account. In the latter instance, whatever portion of their payroll taxes that they choose to put aside into their personal savings account would come back to them in retirement and substitute for the corresponding portion of their Social Security benefits. Plus they would also receive the accumulated interest earnings from their account’s investments. Such accounts don’t just reduce the growth of government spending; they also shift vast amounts from a public sector tax and spend plan to private sector savings and investment.

Compounding the higher returns on stocks and bonds over a lifetime makes a big difference when compared to the lower returns offered by Social Security’s current system.


Social Security’s Current Structure

Social Security with Personal Savings Accounts

Workers see payroll taxes take a big chunk out of every paycheck. Those funds are then funneled through Washington to pay for current retirees’ benefits. It’s a pay-as-you-go system that for decades has counted on fewer and fewer workers to pay for each retiree.

Workers have the choice to put all (or a portion) of those same payroll taxes into a savings account that they own and control, allowing them to accumulate wealth over the years and fund their own retirement.

Over time, personal savings accounts could be expanded to take over the financing for all of the benefits that are currently financed by Social Security payroll taxes. With workers financing their own retirement instead of relying upon government benefits, and with workers taking advantage of the higher investment returns found in private markets instead of the much lower returns offered in Social Security’s current form, this would dramatically reduce Social Security’s enormous budgetary burden. This would amount to the largest reduction in government spending in world history. Eventually the entire employee and employer portions of the payroll tax (a combined 12-plus percent tax on the first $110,100 in wages) could be fully replaced with personal savings and investment that are directly owned by each worker and his or her family. This would amount to the largest reduction in taxes in world history. Many of the proposals for adopting Social Security personal savings accounts are actuarially sound and would fully eliminate the program’s current unfunded liability of nearly $18 trillion. This would amount to the largest reduction in effective government debt in world history. There are additional advantages that go beyond just dollars and cents. Workers’ savings are theirs to keep and can be used to finance their own retirement as they choose – they truly own and control the funds in the personal savings account, unlike with Social Security benefits. Workers can be free to choose their own retirement age, rather than letting the government dictate it for them. Working people across the board, at all income levels, could build savings and wealth through the opportunity to own substantial stakes in businesses and industries around the world – doing far more to promote equality of wealth in America than current proposals based on redistribution and punishing the successful.18 And instead of disappearing into government accounting books, a worker’s lifetime of hard-earned savings can be transferred to their loved ones at death. Of course, there are risks. Investments in stocks and bonds have no guarantee and can incur losses. But a central pillar of all personal account proposals is an opt-in requirement: workers are individually free to accept or reject the opportunity to take risks and invest their savings in capital markets. If they think it is too dangerous, they don’t have to get involved and can stay with the current plan for Social Security. Many proposals also feature a guarantee that personal accounts will pay at least as much as Social Security in its current form, even if workers face large, unexpected investment losses. The key point is that personal savings accounts give workers the freedom to choose how their payroll tax contributions are saved and spent, and this freedom must be at the core of any effort to fix Social Security’s structural flaws.


Proven to Work: Personal Accounts in Chile and the Galveston, Texas Plan One successful model for personal savings accounts was adopted in Chile over 30 years ago.19 Before the reforms, the combined payroll taxes financing their Social Security system were 26 percent or higher, yet their system was still running huge deficits. Moreover, the promised benefits represented a poor deal for Chilean workers on these huge tax payments.

When workers feel that they themselves own a part of their country’s wealth, they become participants and supporters of a free market and a free society.

On May 1, 1981, Chile adopted revolutionary reforms to its Social Security system. Workers now had the choice to stay in the old Social Security system or participate in a new personal savings accounts system. Workers who opted-in to the new system pay, in place of the old payroll taxes, 10 percent of their wages each month into a personal account directly owned and personally controlled by the worker. Workers also contribute an additional 2.9 percent of wages for the purchase of group life and disability insurance, which replaces the old system’s pre-retirement survivors and disability benefits. With their accumulated personal savings account funds, Chilean workers can choose to invest in 20 alternative investment funds that are approved and regulated by the government and managed by private sector investment management companies (Administradora de Fondos de Pensiones). These companies choose the particular mix of stocks, bonds, and other investments for the funds, creating a highly diversified portfolio. The fund options are subject to government regulation that excludes excessively-risky investments and mandates a minimum return to workers. Workers can change investment companies on short notice, creating competition among the investment firms to provide higher returns and better service to their customers. With the investment companies working to manage fund portfolios, there’s no need for the workers to be stock market experts to participate. And the Chilean government backs up the personal accounts with a guarantee that all workers will get at least a minimum benefit in retirement equal to about 40 percent of their average pre-retirement wages (about what the U.S. Social Security system pays to average-income workers today). The personal accounts have been a huge success. By 2001, just twenty years after the reforms were adopted, a full 94 percent of Chilean workers were participating in the new system, probably because the personal accounts paid retirement benefits that were, on average, 50 to 100 percent higher than the old system’s benefits. By 2004, the real rate of return on personal account investments averaged a shocking 10 percent, more than double what reform advocates had expected. And as advocate Jose Pinera explained, the reforms helped shape a major cultural shift in the still-developing country:
For Chileans, the retirement accounts represent real property rights. … Since they have a personal stake in the economy, workers cheer the stock market’s surges rather than resenting them, and know that bad economic policies will harm retirement benefits. When workers feel that they themselves own a part of their country’s wealth, they become participants and supporters of a free market and a free society.20

Within a few years after the reform was adopted, annual economic growth exploded in Chile, with the economy growing twice as fast in the twenty years following the reform than it did in the twenty years prior to the reform. With a major government spending burden removed, Chile’s publicly-held debt has been held down to just 9.2 percent of GDP (compared to over 63 percent of GDP here in America), one of the lowest in


the world. And despite a devastating earthquake that rocked the country in early 2010, Chile is still on track to be the first of the Latin American countries to join the world’s most advanced economies – those with per capita income of more than $25,000 per year – by the end of this decade.21
200 180 160 140 120 100 80 60 40 20 0 Japan Greece Canada U.S. 84 63 55 40 23 16 9 9 143 199

Public Debt (% of GDP), 2010

Brazil Sweden S. Kor. China

Chile Russia

Source: CIA World Factbook

We don’t have to go all over the world to find examples for personal savings accounts. We have a highly successful example right here in America. In 1981, government workers for Galveston County, Texas voted to opt out of Social Security and replace it with a new plan – something federal law allowed state and local government workers to do at the time. Nearby Matagorda and Brazoria counties voted to join them in 1982, starting a wave of state and local government workers seeking a better deal than what Social Security could offer. Not wanting to lose more and more contributors to Social Security’s payroll tax pool, the federal government repealed this opt-out provision in 1983. Under the Galveston Plan close to 10 percent of the worker’s salary is contributed to a defined contribution account each year, split between employee and employer, much like a 401(k) personal retirement account that many workers have in the private sector. Those contributions are invested conservatively in annuities with a guaranteed minimum rate of return (at least 4 percent), rather than investing in stocks and bonds. As of 2005, however, annual rates of return have been much higher, about 6.5 percent on average over the life of the program. Just as in Chile, workers have real savings and investment in this plan, and the result has been much higher benefits than what Social Security promises, let alone what it will actually be able to pay.22 Personal Accounts and the Financial Crisis As mentioned above, investing in capital markets entails risk, and this lesson is clearer than ever in the wake of the financial crisis. Opponents of personal accounts frequently point to losses like these, losses that investors sometimes face in the ups and downs of the market, as evidence that giving workers the freedom to invest for retirement is just too risky. They say the financial crisis proved that personal accounts are a bad idea. Well, didn’t it?


Let’s look at the evidence. In October 2010, I joined with William Shipman, a former investment manager with State Street Global Advisors, to study the impact of the financial crisis on lifetime savings and investment.23 We examined the case of a hypothetical average-income couple retiring at the end of 2009, just after the financial crisis had done all of its damage to financial markets and before those markets started to recover. The couple was given the freedom to choose personal savings accounts (instead of Social Security) when they entered the workforce in 1965 at age 21. Paying what they and their employers would otherwise pay into Social Security into the personal savings account instead, they took the riskiest possible path: investing their entire portfolios in the stock market for their full 45-year working career. The couple’s retirement dreams must have been wiped out by the financial crisis, right? Wrong. The couple would have reached retirement at the end of 2009 with accumulated account funds of $855,175 – nearly millionaires. Indeed, they had been millionaires, but big stock-market losses during the financial crisis trimmed 37 percent from their account funds the year before they retired. This can be considered effectively the worst case scenario. Yet their personal savings account would still be sufficient to pay them about 75 percent more than what Social Security had promised to them. Even though the couple retired immediately after the worst ten-year stock market performance in American history, and even though they had pursued the riskiest investment strategy, they still came out ahead of the current system. Even despite the financial crisis every state and local government pension fund, every corporate pension fund, the federal employee retirement plans, and the successful Social Security reform in Chile all continue to be based on capital investment to finance expected retirement benefits, not a tax-and-redistribution plan. Savings and market investment continue to be universally recognized as the most efficient and the only responsible means of providing for future retirement benefits. And don’t forget, under the personal savings accounts proposals we’ve seen workers have a choice: if they aren’t comfortable with taking on market risk they can choose a less-risky investment strategy or even invest in “risk-free” government bonds, or they can choose to not invest at all and stay in the Social Security system as it stands. The point is that it’s up to them. Workers, not the government, get to choose what’s best for them. The Ryan-Sununu Plan in 2005 Here in America, personal savings accounts for Social Security are not a new idea; in fact, lawmakers have made big pushes for the accounts within the last decade. The conversation first hit the national stage in December 2001 when President George W. Bush’s Commission to Strengthen Social Security published a report advocating such personal accounts.24 Then in 2004 Congressman Paul Ryan (R-WI) and Senator John Sununu (R-NH) introduced comprehensive legislation to fix Social Security’s long-run financial problems by providing for a personal savings account option for all American workers. Under the bill, no changes would be made for those aged 55 and up – those already retired or near

Even though the couple retired immediately after the worst tenyear stock market performance in American history, they still came out well ahead of the current system.


retirement would continue to receive all promised Social Security benefits. Workers under 55 could opt in to a personal savings account system, making contributions to their savings account instead of paying Social Security payroll taxes. With those savings, workers could choose from a number of investment fund options managed by private investment firms, each with different mixes of stocks and bonds or other investments. At retirement, workers would purchase an annuity that provides a monthly stream of benefit payments at least as generous as the benefits they would have received under the current Social Security system. But the left over savings are the worker’s to keep and use as they see fit in retirement, and can be left to their loved ones when they pass away. Like in Chile, the federal government would guarantee that retirees with personal savings accounts would receive benefits at least as generous as what they would have received under the current Social Security system, preserving the “safety-net” feature of the program for seniors. Also like in Chile, the federal government would still pay the portion of Social Security benefits based on the past taxes that workers have already paid into the current Social Security system, so nobody would lose benefits that they have already “paid for.” Social Security’s Chief Actuary reported that the reforms would return Social Security to fiscal solvency and keep it there for over 75 years into the future and beyond; the personal savings accounts would be so beneficial for workers that eventually almost everyone would opt in; payroll taxes would drop from their current combined 12.4 percent rate to just 4.2 percent, enough to finance all remaining survivors and disability benefits; and with standard, long-run market returns on their savings, after just 15 years workers will have accumulated an inflation-adjusted $7.8 trillion of savings, enough to provide substantially more generous benefits for retirees than Social Security now promises.25 This is a clear contrast from the benefit cuts, tax increases, and inflated government borrowing that we will see under Social Security in its current form.

Cost Ratio (Percent of Taxable Wages)
18 16 14 12 10 8 6 4 2 0 The "cost ratio" for Social Security can be roughly described as the combined payroll tax rate that workers would need to pay in order to fully cover the cost of benefits and administration of the program.

Current Social Security

Ryan-Sununu Plan


Financing the Transition Because Social Security currently operates on a pay-as-you-go basis, if current workers start putting money into savings instead of paying payroll taxes, funds will have to come from somewhere else to pay for current retirees’ benefits. The transition financing gap is significant: potentially over a trillion dollars.

The fallacy persists that it would be politically easier to cut benefits or raise taxes than to enact major structural reforms like personal accounts.

There is good news, however. First, the need for the additional transition funds phases out over time as more and more participate in the personal accounts, and eventually the new system actually generates surpluses relative to the current Social Security system. In other words, the cost is temporary whereas the benefits (shifting from an unsustainable tax and redistribution, pay-as-you-go system to a fully-funded retirement savings system) are lasting. This is true for eliminating the unfunded liabilities of any underfunded pension plan. Second, the financing gap can be paid for entirely by cutting wasteful government spending. Americans for Prosperity has already identified over $5 trillion in sensible cuts that can be achieved immediately,26 and there are plenty of good proposals to trim the federal government’s bloated budget. Further entitlement reforms would achieve additional savings that can be used to finance the transition. Cutting spending now to shore up Social Security’s finances for the future is an opportunity worth pursuing. Conclusion Americans have a choice. Social Security as it currently stands promises a future of tax increases, benefit cuts on the backs of seniors and future retirees, or some combination of the two – all of which makes an already bad deal for workers even worse. Social Security personal savings accounts transform the current tax-and-redistribution model into a personal savings and wealth engine for workers and their families, all while saving Social Security from fiscal ruin and preserving its safety net for seniors. As this program takes hold, eventually the payroll tax that is currently paid by workers and their employers could be phased out all together. As the personal accounts funnel new savings and investment into the economy’s capital markets, workers can build wealth while additional capital investment can translate into higher productivity and new jobs in the American economy. The fatal fallacy persists that it would be politically easier easier to cut benefits or raise taxes than to enact major structural reforms like personal accounts. Instead, a mighty grassroots movement supporting Social Security freedom and prosperity can make an innovation like personal savings accounts a reality for America’s working people today.


Endnotes: 1. Social Security adminiStration, Full Retirement Age (online at (accessed January 25, 2012). 2. office of management and Budget, Historical Tables of the United States Budget, Table 3.2: Outlays by Function and Subfunction (February 2012) (online at Historicals). 3. Social Security adminiStration, Social Security and Medicare Tax Rates (online at http://www.ssa. gov/oact/ProgData/taxRates.html) (accessed January 24, 2012); Social Security adminiStration, Contribution and Benefit Base (online at (accessed January 24, 2012). In recent months Congress has had heated debates over extending the temporary payroll tax cut that was first implemented in 2011, because some believe the tax break will help stimulate the still-ailing economy. The employee-portion is scheduled to revert back to 6.2 percent at the end of 2012. 4. Andrew G. Biggs, From Ponzi to Perry: The Truth About Social Security, american enterpriSe inStitute, The American Online Magazine (September 14, 2011) (online at 5. oaSdi Board of truSteeS, The 2011 Annual Report of the Board of Trustees (May 13, 2011) (online at (hereinafter “Trustees Report”). 6. the White houSe, Fiscal Year 2000 Budget of the United States Government: Analytical Perspectives, at page 337 (February 1999) (online at 7. Fleming v. Nester, 363 U.S. 603 (1960). 8. Trustees Report, supra note 5, at page 3, 5, and 14. 9. Elizabeth Arias, National Vital Statistics Reports: United States Life Tables, 2007, centerS for diSeaSe control and prevention, diviSion of vital StatiSticS, at page 48 (September 28, 2011) (online at 10. Bureau of laBor StatiSticS, Labor Force Participation Rate from the Current Population Survey (through December 2011) (online at 11. Social Security adminiStration, Table IV.B2 – Covered Workers and Beneficiaries, Calendar Years 1945-2086 (May 13, 2011) (online at 12. Orlo Nichols et. al, Internal Real Rates of Return Under the OASDI Program for Hypothetical Workers, Social Security adminiStration, Actuarial Note No. 2008.5 (April 2009) (online at http://www. ) (“Table 3 - Payable Benefits Scenario”). 13. See, e.g., Peter Ferrara, Social Security is Still a Hopelessly Bad Deal for Today’s Workers, the cato inStitute, Project on Social Security Privatization, SSP No. 18 (November 1999) (online at http:// 14. Jeremy Siegel, Stocks for the Long Run, 4th Edition, at page 13 (New York: McGraw-Hill, 2008) (hereinafter “Stocks for the Long Run”). 15. Edgar K. Browning, The Anatomy of Social Security and Medicare, The independent revieW, Vol. 13, No. 1, at page 12 (Summer 2008) (online at; BarclayS capital, 2011 Equity Gilt Study (online at (accessed January 27, 2012). 16. Stocks for the Long Run, supra note 14, at page 15. 17. Peter Ferrara, America’s Ticking Bankruptcy Bomb (New York: Harper Collins, 2011); Peter Ferrara and Michael Tanner, A New Deal for Social Security (Washington, DC: Cato Institute, 1998).


tical aSSociation,

18. Martin Feldstein, Social Security and the Distribution of Wealth, Journal of the american StatiSVol. 71, No. 356 (December 1976) (online at

19. Here and throughout this section on Chile, see Jose Pinera, Empowering Workers: The Privatization of Social Security in Chile (1996) (online at; Jose Pinera, Toward a World of Worker-Capitalists (April 2001) (online at; Jose Pinera, Retiring in Chile (December 2004) (online at 20. Jose Pinera, Retiring in Chile (December 2004) (online at http://www.transformamericas. org/?p=124). 21. the World Bank, Data: Chile (online at (accessed January 31, 2012); organization for economic co-operation and development, StatExtracts: Central Government Debt (online at (accessed January 31, 2012); central intelligence agency, World Factbook Country Comparison: Public Debt (2010) (online at; Andres Oppenheimer, Chilean ‘Model’ is Shaken, But Still Very Much Alive, the miami herald (August 28, 2011) (online at 22. Ray Holbrook and Alcestis “Cooky” Oberg, Galveston County: A Model for Social Security Reform, national center for policy analySiS (April 26, 2005) (online at ba514); Merrill Mathews, No Risky Scheme: Retirement Savings Accounts that are Personal and Safe, inStitute for policy innovation, Policy Report No. 163 (January 2002) (online at IPI%5CIPIPublications.nsf/PublicationLookupFullTextPDF/B0037202A407D6E886256B490008CA89/$ File/PR-SSPrivatization.pdf?OpenElement); Theresa M. Wilson, The Galveston Plan and Social Security: A Comparative Analysis of Two Systems, Social Security adminiStration, Social Security Bulletin, Vol. 62, No. 1 (1999) (online at; Testimony of Don Kibbedeaux before the Senate Committee on Finance, Subcommittee on Securities (April 30, 1996). 23. William Shipman and Peter Ferrara, Private Social Security Accounts: Still a Good Idea, Wall Street Journal (October 27, 2010) (online at 24. preSident’S commiSSion to Strengthen Social Security, Strengthening Social Security and Creating Personal Wealth for All Americans (December 2001) (online at pcsss/Final_report.pdf). 25. Stephen C. Goss, Chief Actuary, Social Security Administration, Estimated Financial Effects of the ‘Social Security Personal Savings and Prosperity Act of 2004’ (July 19, 2004) (online at http:// See also congreSSional Budget office, Analysis of the Roadmap for America’s Future Act of 2010 (January 27, 2010) (online at ftpdocs/108xx/doc10851/01-27-Ryan-Roadmap-Letter.pdf). 26. americanS for proSperity, Cut Spending Now: Recommendations for the Joint Select Committee on Deficit Reduction (October 2011) (online at

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