Should Your State Opt Out of Social Security?
Remarks of Paul R. Farago,
Senior Advisor and Board Member,
Cascade Policy InstituteThis presentation is revised from remarks given to a luncheon audience organized by the
Center of the American Experiment in Minneapolis, Minnesota on June 23, 1997.June 23, 1997
Should your state opt out of Social Security? Until recently, asking such a question would have been unthinkable. It might be the equivalent of asking whether Americans should renounce motherhood or apple pie.
If the citizens of America are to have a future with a sense of opportunity and security, we must ask tough questions. That's what think tanks like Cascade Policy Institute are supposed to do.
My story begins with the words of a man who asked these tough questions for the people of his country, and who answered them in ways that have transformed their future. José Piñera is from Chile, with a PhD in economics from Harvard. In 1980, as Chile's 32-year-old minister of labor and social welfare, he privatized the national pension system that had been first enacted in 1925, a full ten years before Social Security in the United States.
I met Dr. Piñera in January 1996 at a meeting hosted by the Cato Institute; an organization that has been asking the tough questions about America's Social Security system for 20 years. Upon hearing him speak, I sensed there would be a growing variety of ways to advance his ideas. I immediately extended an invitation for him to speak in Portland on behalf of Cascade Policy Institute. I began to consider how we in Oregon, or people in any state for that matter, could use our influence to convince Congress to wake up and take corrective action while there is still time for an orderly transition away from the failed system. In discussions with Institute staff about the prospects for Dr. Piñera's talk, I hit on an idea. Our state had already led the nation in crafting alternative solutions to failed nationalized safety net programs. For example, the Oregon Health Plan was the first in the country to successfully waive out of Medicaid in 1993. Also, Oregon's JOBS Plus Welfare Reform plan was second to win a waiver from the Clinton Administration in 1994. Ten states successfully waived out of welfare. Then, last year, Congress ended the entitlement, enabling the states to design their own alternatives. It occurred to me that these examples set good precedent. Now it's time to try it with Social Security.
The virtues of an Opt-Out become apparent at once. If Oregonians did not have to pay Social Security taxes, then our state would become a haven for employment, with incentives for employers and employees alike. Further, our savings rate would be boosted from the introduction of tax-exempt private retirement accounts. Younger people receiving a more modest payroll deduction would earn more, save more, and work harder. Capital would flow into Oregon - the necessary ingredient to boosting average wages without sacrificing productivity.
At Cascade Policy Institute the outlines of a strategy emerged. First, bring Dr. Piñera to Oregon for a major speech. Introduce the Oregon Opt-Out idea at the same time. Generate mainstream recognition of the successful Chilean model by introducing Dr. Piñera to local media, much like my mission to Minneapolis on June 23rd.
Cascade's staff and advisors followed the plan. Dr. Piñera visited Portland on June 18, 1996. He was accompanied by Michael Tanner and Nicole Gray of the Cato Institute. One hundred-sixty people attended the Institute's breakfast event at the Benson Hotel, where Presidents stay when they visit Portland. The event coincided with national news on the Blue Ribbon Panel on Social Security reform. Two local papers wrote very positive accounts of Dr. Piñera presentation and specifically hailed the Oregon Opt-Out. Copies of these articles and a video of the event were distributed to influential opinion leaders and policy makers statewide.
After such an enthusiastic response to Dr. Piñera talk and our idea for a state-based alternative, we went to work to insure that Oregon would be the first state in the country to officially talk about opting out of Social Security.
Oregon's legislature meets only about six months out of every two years. It convened in January, and the new Oregon Senate majority leader, Gene Derfler - who is on Social Security himself - introduced Senate Concurrent Resolution 2. The resolution, based on the language drafted by Cascade's staff and advisors, set out the reasons why Oregon's legislature no longer believes the federal Social Security system can be entrusted with the retirement savings of Oregonians. It instructs Oregon's members of Congress to enact a waiver system allowing states to opt out of Social Security and set up their own privatized retirement plans for every citizen in the state.
The Opt Out resolution passed the Senate by a two to one margin in March, and passed the House by a 31-22 margin in May. Not requiring the Governor's signature, the resolution was signed by the Senate President and House Speaker, and delivered to Oregon's Congressional delegation.
You may wonder why Social Security must be reformed state by state. Can't rational minds in Congress comprehend what Oregon's legislators have figured out, and solve the problem all at once for the entire country? Sadly, I think not.
Congress and the Administration seem oblivious to the fact that most younger workers worry that Social Security won't be there when they retire. Senators and Representatives seem more attentive to special interests like AARP lobbyists than to the millions of older Americans concerned about the economic future of their children and grandchildren. That's why Oregon's first step toward enactment of the Opt Out is so dramatic. It is a textbook example of how the practical world of national politics can be successfully seeded with good ideas by free-market think-tanks. The power of reason is our only remedy to national Social Security politics.
Newspapers and magazines nationwide have picked up on what Oregon is doing to change the Social Security debate. The Indianapolis News, for example, editorialized on May 21st that "The state of Oregon has blazed a trail that other states would do well to follow." I was especially impressed by the last paragraph of that editorial:
"Citizens should not be required by law to send any retirement savings to the federal government. If given the freedom to choose where to invest their money, most folks surely would opt for a better money-manager than an institution with a five trillion dollar debt."
True enough, but even this writer didn't consider the nine trillion dollar unfunded Social Security liability.
Cascade Policy Institute will issue its first detailed transition plan for Oregon in July, so that we are prepared for the next step after Congress allows states to opt out. When the Clinton administration grants our Governor's waiver request we will be ready. The plan will be designed so as not to further weaken the un-funded Social Security system. People in states staying in Social Security will be no worse off when Oregon decides to give its future retirees self-ownership of their own savings and stewardship of their own retirement decisions.
The plan is written by Randall J. Pozdena, Ph.D., a member of the Oregon Investment Council which manages the investment side of Oregon's $25 billion Public Employees Retirement System (although the plan is his and does not necessarily represent the views of the Oregon Investment Council). The plan requires no new taxes and includes four main elements: 1) Existing retirees would be assured of continued Social Security benefits; 2) Public and private employees in Oregon would no longer be subject to Social Security taxes, but would invest a portion of their earnings and savings into Oregon Private Retirement Accounts, OPRAs for short; 3) Younger people with OPRAs would have the real opportunity to earn returns several times greater than Social Security even hopes to attain, and; 4) Middle-aged people who have paid into Social Security for some years would be guaranteed no less than they would receive from Social Security at retirement, and still might retire with more.
Let me emphasize that there are many possible ways to transition from the unsound pay-as-you-go retirement system to a fully-funded privatized one. Cato Institute has already released two possible plans that would work for the United States as a whole. Our Oregon plan will be just the first of several such state-based options.
And, we don't have to start from scratch on any of these plans. You see, until recently, Congress actually allowed certain Americans to opt out of Social Security and invest privately. The prime beneficiaries of these waivers were public employees. While they couldn't opt out one by one, their governmental units could withdraw from Social Security, and a number did so. As late as 1981 three counties in Texas voted to opt out and form their own system. This was too much for Congress, and so it ended that waiver opportunity in 1983. But we now have the record of those three counties, and it's impressive. Such plans can very well serve as models for more general proposals to let all workers, public and private, save for their own retirement.
Cascade Policy Institute's efforts in Oregon demonstrate one of the strengths of the American federalist system. Each state can experiment with different options; different ways of solving our vexing social and political problems. Rather than the one-size-harms-all straitjacket of large federal programs, don't you agree that it's about time for those of us at the local level, outside the reach of Washington, D.C.'s lobbyists, to have a say in how we deal with these issues?
Many questions remain before any serious reform of the Social Security System will be enacted. Those questions will be answered much quicker if citizens in every state are offered a chance to have input.
In conclusion, my own view is that we have a good idea about how to solve this problem. It's a simple instruction to Congress from the people: Permit the states to seek waivers from Social Security. Allow the states to opt out and demonstrate that privatization of pensions will succeed in the United States, as in Chile and a growing number of other countries. Such a plan worked to reform welfare, and it can work to reform Social Security.
So now it's time to answer the question I posed at the beginning: Should your state opt out of Social Security? My answer is ... I'm an Oregonian. It's up citizens in every state to make this decision for yourselves. If you're interested in reestablishing the link between effort and reward; between personal responsibility and personal rights, then join us in sparking the movement to privatize the country's largest government program. Tell your lawmakers, tell your governor, tell your family, friends and neighbors -- that you want a future that includes private retirement savings accounts -- that you want a future with a sense of opportunity and security for your children and your grandchildren. Tell them you want your state to opt out of Social Security.
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