Retiring with Dignity: Social Security vs. Private Markets
by William G. Shipman
William G. Shipman is a principal with State Street Global Advisors in Boston and cochairman
of the Cato Institute's Project on Social Security Privatization.
Retiring with financial dignity is in jeopardy. That is the direct result of Social Security's ever-
expanding role in the economics of both retirees and workers. Compassionate in intent, but
flawed in design, Social Security will prevent many from enjoying financial security in their later
Unlike personal savings, pensions, and independent retirement accounts, all of which are stores
of wealth, Social Security is a misguided political construct, wherein one's retirement benefits
are dependent on the willingness of future workers to be taxed.
Benefits paid to present recipients are low. Benefits to be paid to future recipients will be even
lower. Worse, the legal requirement to pay Social Security taxes prevents workers from investing
the money lost to those taxes in higher earning assets.
Beyond that, the unsound financial foundation of the system virtually ensures that the promised
benefits, low as they are, will be reduced even further. In the past, when Social Security's
financial precariousness was addressed, the legislative response was to increase taxes and reduce
benefits. Such responses not only failed to solve the problem, they exacerbated it.
There is a better solution. Allow people the freedom to invest their Federal Insurance
Contributions Act (FICA) taxes in financial assets such as stocks and bonds. History shows that
the financial return on those instruments meets retirement needs at a fraction of Social Security's
For example, assuming historical rates of return, if individuals born in 1970 were allowed to
invest in stocks the amount they currently pay in Social Security taxes, those individuals could
receive nearly six times the benefits that they are scheduled to receive under Social Security, as
much as $11,729 per month. Even a low-wage earner would receive nearly three times the return
on Social Security.
The idea of privatizing a public pension system is neither new nor untried. Where it has been
properly implemented, it has been remarkably successful. For governments, privatization is the
only viable answer to Social Security's inherent problems; for individuals, it is a profitable one.
Social Security was born of the Great Depression. It was a political response to a severe
economic trauma. During the first years of the 1930s real gross national product contracted by
more than 25 percent. Unemployment rose to almost 22 percent. The stock market virtually
imploded, dropping by 70 percent from 1929 to 1934.