How Privatization AND Immigration Can Cure Social Security

By Jane White, President of the Retirement Solutions Foundation and a former financial journalist. She can be reached via email at Jane@retirement-solutions.org. The Retirement Solutions Foundation is a non-partisan organization dedicated to educating the public about saving for retirement.

There isn't much doubt that Social Security is "broke" and needs fixing in order to stay solvent for future retirees. It's agreeing on the fix that's problematic. At best, most Democrats contend that stocks are too risky and simply want to mend the current system by tweaking taxes and retirement age and George Bush envisions a privatization overhaul that involves using the free market to boost nest eggs.

Myth Number One: Stocks are too Risky for Social Security: Read my lips, Democrats: stocks belong in Social Security for taxpayers with at least a 20-year time horizon, beating bonds and cash hands down. The problem with the Bush approach isn't the investment product; it's the purveyors of the product. Too many members of the financial community are collusive rather than competitive, charging outrageous fees for poor performance in the managed funds in 401(k) plans.

Myth Number Two: Social Security Privatizing Is An Evil-and Untested--Republican Plot: Ironically, the best idea for Social Security reform came from Bill Clinton, who says that not pulling off privatization during his administration was one of his biggest regrets. The template for his privatization approach? Believe it or not, it's a public-sector program: the government employees' Thrift Savings Plan in which employees direct part of the payroll tax to invest in one of three mutual funds. Most of its assets are in the S&P 500, an investment choice that solves the twin challenges of strong performance and low fees.

Employers who offer their employees 401(k) plans might learn a thing or two from the Thrift Plan. Through a competitive bidding process, its board of directors picks a fund manager to run the plan. Without fanfare, the board has discouraged congressional and special-interest efforts aimed at divesting itself of certain securities-and presumably resists efforts by "pay-to-players" in the financial community to peddle high-fee, poor performing investments.

If privatized Social Security accounts were simply a clone of the Thrift Plan, we'd have little to worry about. However, rumor has it that Bush favors a plan modeled after recommendations by the 2001 Social Security Commission in which once folks' account balances reach $5,000 they would get to switch out of index funds into managed funds. As Chile's and Poland's experiment with privatization demonstrates, it was the management of these retirement funds that was the problem: in the case of Chile's system, hidden fees reduced benefits by one third, in Poland, commissions were charged on false accounts.

Myth Number Three: The only solution to Social Security's solvency is a mix of or a choice between higher taxes, benefit cuts or privatization: The best solution to both Social Security's and Medicare's potential shortfall is to grow the economy by "importing" the contributors to it and the tax base that are disappearing because Americans are having fewer kids-immigrants. Last year the U.S. birthrate fell to its lowest level since 1909.

Immigration plays an important role in population trends; it's because of increased immigration that the U.S. workforce grew by 24% in 1910 from the previous year, not because folks had 24% more kids.

A recently released report by a former INS official says that if we boosted immigration by one third we could reduce the Social Security deficit by 10%. Therefore, if we got really ambitious and "imported" three million immigrants we'll have the Social Security situation 100% solvent even without privatization. What's more, immigrants also boost the economy by buying homes, the least-talked about aspect of retiree finances, accounting for at least 50% of current retiree assets.

Interestingly enough, one of the reasons why George Bush may be welcoming "the tired, the poor and the Hispanic" isn't just to repay them for helping re-elect him but because he understands their future role in keeping this country solvent-unlike some liberal California politicians who complain that immigrants are bad for the environment because they cause traffic jams. With any luck, the U.S. will become home to 103 million people of Hispanic origins by 2050-almost 200% more than the 36 million Hispanics living here already.

So the key to a secure Boomer and Buster retirement future is to dust off Lady Liberty and sound a clarion call to the rest of the world that while we're available to help them establish democracies in their own countries, we've already ironed the kinks out of the process and it might just be less costly and bloody if they just moved here. The melting pot of tomorrow is a win-win solution for both the immigrants who want a piece of the American Dream and current citizens who want the dream to last through their twilight years.