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The Need for Privatization Essay

Every paycheck 7.65 percent is taken out for a retirement program, after the employer kicks in, a total of 12.4 percent of what you earn goes to the government to fund your retirement. The government system offers minuscule returns by anyone’s measure and the system is expected to go bankrupt as soon as 2014. If a private company had these problems, no one would invest. But, this is a mandatory program, Americans have to stay in this system and are forced to invest in its fated future. Social Security is one of the biggest disasters of American history. In a country that was founded on the principles of Capitalism and free markets, this socialist program limits people’s pursuit of happiness.

Percent Who Believe Social Security Will Not Be There When They Retire

All under 6560%

Generation X70%

Baby Boomers69%

Social Security is an un-funded pay-as-you-go system. The idea is fundamentally flawed and follows the design of the famous illegal pyramid schemes. Many people claim that the constitution provides a “social safety net”, because the preamble of the constitution states that the government should “promote the general welfare” of the people. The constitution then goes on to list the enumerated powers of the state. Nowhere in the list does it say that the government should provide a retirement of healthcare for the people. If the founding fathers wanted these programs, they would have provided a way to pay for them. The rate of savings in the United States is 26 percent of Gross National Product; the country of Chile saves 30 percent of their GNP.

With these two countries saving close to the same amount for their future, you would expect both to have similar results for retirees. The United States’ Government run pay-as-you-go system provides meager results as compared to even the least progressive private investment. The Country of Chile used to have the same system the US currently uses, but decided to let people invest their own money how they choose in the open market. Chileans pensions are 70 to 100 percent higher than under the old government system since the switch to a private solution.

The Chile system says that a person must contribute at least ten percent of their wages to the retirement program. Many workers contribute more than the ten percent that is required. In a private retirement system, people are free to choose what is best for them. José Piñera, who is Chile’s minister of labor, says:

A worker can contribute more than 10 percent if he wants a higher pension or if he wants to retire early. Individuals have different preferences: some want to work until they are 85; others want to go fishing at 55, or 50, or 45, if they can. The uniform pay-as-you-go social security system does not recognize differences in individual preferences. In my country, those differences had led to pressure on the congress to legislate different retirement ages for different groups. As a result, we had a discriminatory retirement-age system. Blue-collar workers could retire at 65; white-collar workers could retire more or less at 55; bank employees could retire after 25 years of work; and the most powerful group of all, those who make the laws, the congressmen, were able to retire after 15 years of work.

Opinion of Social Security Reforms

The privatized Chilean system is obviously working better than the current US system. Many critics claim that the switch to a private system would be difficult to do. Chile, Mexico, Britain, and Australia have all successfully made the switch to a non-government system. All four of these countries are now striving under their new private retirement systems. The main problem cited in privatizing social security is how to pay the people that have paid into the program their whole life. There is an easy solution to this. The American Government has many programs that it does not have to provide under the Constitution. The government could easily abolish unnecessary arms such as the departments of Agriculture, Commerce, and Education.

The government also has excess assets that could be sold to support the people who have been forced to be dependent on Social Security. Social Security’s website lists the number of agency field offices at 1,300; that’s a lot of office space, and a lot of bureaucrats that wouldn’t need to be paid. If countries like Mexico and Chile can change over to privatized retirement systems, the United States will have no problem replicating their success. José Piñera, Chile’s minister of labor, described how the transition to a private system was made:

The real transition cost of the system is the money the government ceases to obtain from the workers who moved to the new system, because the government is committed to pay the pensions of the people already retired and of those who will retire in the future. That transition cost can be calculated. In Chile it was around 3 percent of gross national product. How we financed it is another story. It will be done differently in each country. Suffice it to say that even though governments have enormous pension liabilities, they also have enormous assets. In Chile we had state-owned enterprises. In America I understand that the federal government owns a third of the land. I don’t know why the government owns land, and I don’t know the value. Nor am I saying that you should sell the land tomorrow.

What I am saying is that when you consider privatizing Social Security, you must look at assets as well as liabilities. I am sure that the U.S. government has gigantic assets. Are they more or less than the liabilities of the Social Security system? I don’t know, but the Cato project on privatizing Social Security will study that. In Chile we calculated the real balance sheet and, knowing there were enough assets, financed the transition without raising tax rates, generating inflation, or pressuring interest rates upward. In the last several years we have had a fiscal surplus of 1 to 2 percent of GNP.

Opinion of Privatization Plan

Strongly Favor38%

Somewhat in Favor31%

Lean in Favor4%

No Opinion12%

Lean Opposed2%

Somewhat Opposed6%

Strongly Opposed6%


The future for Social Security looks grim, but there is some hope for privatization. The Republicans currently want private Social Security, and George Bush said “Don’t treat Social Security like it’s a federal program.” In February of 1997 the Oregon state senate passed a resolution requesting that the state be allowed to opt out of the Federal Social Security program to start their own private retirement system. As people begin to see that the national program is going bankrupt, there will be great political pressure on congressmen to enact a new program.

Medicare/Medicaid is another Federal program that is in great need of reform. Medical costs account for fourteen percent of our Gross Domestic Product. The current system decreases competition and skyrockets prices for medical care. The heavily regulated heath care business is restricted in not only getting cutting edge treatments to patients, but also in how they see patients. The American Medical Association limits the number of medical students accepted to Universities and decrease competition. There is never an ad in the help wanted section of the newspaper looking for doctors. When was the last time you heard of a doctor collecting unemployment? Government regulations also limit what non-doctors can do. Its easy to see that its doesn’t take a PHD to do an annual checkup or to fix a broken bone.

Regulations hurt Americans and drive up healthcare. With Medicare, there is a price put on procedures. An experienced doctor gets just as much as the recent med school graduate for doing open-heart surgery. The experienced doctor is unable to make his own prices. These practices discourage competition and are bad for America. Canada and Britain both have socialized health care systems. The programs cost more than the semi-capitalist American system, but polls seem to show that citizens in those countries enjoy them.

The care in these countries is mediocre and there is not much cutting edge medicine being done because there is no incentive to. There is also no incentive for doctors to perform to the best of their ability. Canadian patients cross the boarder to seek care at the Cleveland Clinic and when Margaret Thatcher needed surgery, she crossed the Atlantic to get help. The wait for cancer radiation in Canada is three to six months, twelve to twenty two months for a new plastic hip.

Federally run programs will never be as cost effective or efficient as those run in the private sector. Time will tell as to whether Social Security and Medicare will fall out of Federal hands, but common knowledge of Economics shows that more competition breeds more innovative and less expensive solutions.

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