Opting Out of Social Security
By David Henderson
My suggestion is that the government, before making any major changes to the Social Security formulas, first allow Americans to opt out of the system, thereby avoiding any future payroll taxes but also forfeiting any accrued benefits. However, if the person represents a net asset to the Social Security program from the government’s perspective, then he or she must contribute this amount before being allowed to opt out.
An opt-out option would improve upon the status quo from the government’s perspective, because Americans can opt out only if they represent a neutral or net liability to Social Security. On the other hand, since it’s voluntary, it would seem that my proposal cannot hurt the Americans who opt out; anyone worried about being hurt by this procedure can choose to remain in Social Security. (italics in original)
This is an excerpt from the Econlib Feature Article by Robert P. Murphy, “Opting Out of Social Security,” published this morning.
Along the way, he points out a problem with Megan McArdle’s statement of the problem:
Although her other comments (not quoted) about worker productivity indicate that McArdle has some grasp of the situation, her statement quoted above is inaccurate. If a worker takes 10.6 percent (the combined employer and employee portions of Old-Age Survivors Insurance) out of his paycheck every month and buys private assets, there is an important sense in which this “provides for” his future retirement more than if the government takes the same amount (from him and his employer) and transfers the money immediately to a current Social Security beneficiary.
Specifically, when workers genuinely save some of their income (meaning it’s not immediately spent by the government), their action frees up real resources that can be channeled into productive investments. When today’s workers use (some of) their labor hours to create hammers, nails, 18 wheelers, and factories to rent and/or sell to young workers in 30 years, they amplify the productivity of the next generation. Armed with this higher stockpile of tools and equipment, the next generation of workers can produce more goods and services, out of which they can afford to pay the older, retired workers (who are now acting as capitalists). Contrary to McArdle’s claim, the whole process is a normal win-win market exchange, which is not driven by mere altruism or expectations of gratitude.
Editing this piece and going back and forth with various drafts was a real learning experience for me. At first we both thought his proposal was straightforward with no major complications. But Bob, to his credit, kept noting complications and then we (usually he) figured out how to solve them or point them out. You’ll see if you read the whole thing.