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THE CASE FOR PRIVATIZING
Address by EDWARD H. CRANE, President & CEO, CATO Institute
Delivered to the S.O.S. Retraite Sante, Paris, France, December 10, 1997
I believe there is no economic issue facing the world today that is more important than converting public pension programs from pay-as-you-go government-run systems into individually capitalized privately owned retirement systems. Having just flown in yesterday from a two-day conference in London that the CATO Institute co-sponsored with The Economist at which no less than 38 nations were represented, I can personally attest to the growing international attention this crucial public policy question has been receiving of late.
The most successful example of Social Security privatization, of course, has been in Chile. So, you can imagine how very pleased all of us at my Institute are to have Jose Pifiera as co-chairman of our Project on Social Security Privatization. That project was launched on August 14, 1995 on the 60th anniversary of the creation of the Social Security system in the United States. We made the point that at 60 it was perhaps time for Social Security itself to be retired.
As we all know, Social Security was the brainchild of German Chancellor Otto von Bismark in 1889. His motive for doing so, I believe, had little to do with compassion and much to do with buying votes and making citizens increasingly dependent on his militaristic government. In America the idea of what is essentially a socialized retirement system seemed inconsistent both with the Constitution's limits on federal power and with the average citizen's desire for personal independence. It took the Depression to change that view and it's interesting to note that one of the very first organizations to call for a national government retirement program was the American Association for Labor Legislation, an offshoot of the International Association for Labor Legislation, founded in Germany.
Whatever President Roosevelt's motives might have been when he signed the bill in 1935 creating the Social Security system, the German influence was there. He and his Democratic Congress borrowed heavily from Bismark's original plan.
In particular, the new public retirement program - there hadn't been one previously - was sold as an "insurance" program and financed out of payroll taxes rather than general revenues in order to suggest that "premiums" were, in effect, being paid for old-age insurance. As Roosevelt himself put it, "We put those payroll contributions there so as to give the contributors a legal, moral, and political right to collect their pensions... With those taxes in there, no damn politician can ever scrap my social security program." This official government deceit of describing Social Security as an insurance program continues to this day. I dare say that if private insurance company executives were to engage in such fraudulent activities they would end up in jail, as they well should.
Social Security in the United States, as it is in most nations in the world, is a pay-as-you-go system and has been except for the first couple of years of its existence. As such, it is an intergenerational wealth transfer. Nothing less, nothing more. Its solvency, therefore, depends on demographic factors more than it does on economic factors such as productivity gains. Birth rate and longevity determine the solvency of pay-as-you-go retirement systems.
In the United States the birth rate at the time of the creation of Social Security was 2.3 but had risen to 3.0 by 1950 and continued to climb during that decade. Today it is 2.1. The average life expectancy in 1935 was 63 and today it is 75. That's good news for Americans, bad news for the Social Security Administration. As a result of these …