Privatizing Social Security.

• Author: TABARROK, ALEXANDER
• Position: Review

Privatizing Social Security Edited by Martin Feldstein Chicago: University of Chicago Press, 1998. Pp. 470. $60.00 cloth.

Social security used to be called the third rail of American politics, because any politician who touched it was risking political death. Thankfully, that characterization is no longer apt. The impending crisis of Social Security has forced politicians of both parties to think seriously about reform. Although the dominant view in Congress is still that Social Security can be "saved" by a judicious combination of benefit cuts and tax increases, successful privatizations elsewhere have broadened the horizon of the politically feasible. The collection of papers on privatization edited by Martin Feldstein is therefore both timely and vital.

Privatizing Social Security contains ten papers plus comments and an introduction. Five of the papers examine privatizations abroad (in Chile, Australia, the United Kingdom, Mexico, and Argentina). Three papers model the economic effects of various privatization plans in the United States, paying particular attention to the transition path from a government system to a private one. One paper reviews the evidence on how individuals currently structure their voluntary retirement plans. A final paper surveys the evidence on administrative costs in public and private retirement systems.

In the introduction, Feldstein makes a simple but profound point that drives the rest of his analysis. If tax rates remain constant, then a pay-as-you-go Social Security system cannot pay a rate of return in excess of the growth of real wages. Previous generations received high rates of return from Social Security only because the tax rate kept rising (from 2 percent in 1940 to 12.4 percent since 1988). But tax rates cannot rise forever, so the most future retirees can expect to earn on their Social Security "savings" is about 2.6 percent a year (the rate of growth of real wages since 1960.) Over the same period, however, corporate capital has earned a rate of return of 9.3 percent. The difference between what Social Security pays and what an individual could earn with a portfolio of stocks and bonds is equivalent to a tax on labor earnings. The tax is substantial. Following Feldstein, consider a 45-year-old employee who contributes $1,000 to Social Security to "buy" benefits that will be paid at age 75. At 2.6 percent, the $1,000 contributed pays out $2,160 thirty years later. But at 9.3 percent the same...