The Political Economy of Social Security Reform Proposals

Abstract

Various interest groups and the executive branch of the US govemment have proposed fundamental changes in the structure of the US Social Security system. Most of these reform proposals have entailed some form of privatization of the system. The term privatization in this context means some combination of(1) transforming the system from a pay-as-you-go (PAYGO) system to a prefunded system; (2) changing the asset composition of the system's portfolio from special issue, nonmarketable US Treasury securities toward a heterogeneous portfolio including private securities (corporate equities and bonds); and (3) allowing private management of at least part of the asset portfolio by either individual participants, their chosen representatives, or a quasi-public board of portfolio administrators. In the most extreme versions (strong and pure privatization), the current system would be phased out and replaced by private contributions into individually managed retirement accounts with complete freedom to choose portfolios and no state-guaranteed social insurance or guaranteed retirement income.1 The proponents of these proposals cite projected deficits in SS budgets and the relatively low projected rates of return on contributions to current and future system participants as the reasons for making the changes. Additional arguments include an expected increase in the rates of saving and investment resulting from privatization, and in some cases, approval of the resulting decline in the relative size and power of the national government. This article makes the following arguments: