Social security reform is arguably the most dominant national issue in the United States these days. Proposed reforms, which call for personal accounts and privatization, would take advantage of the dynamic capital markets and the principles of free market economics to increase the ownership and control of individuals over their own lives and their own retirement savings. Principled conservatives and libertarians should undoubtedly support such reforms. But principled liberal egalitarians should also support these reforms.

Regardless of philosophical beliefs, the actuarial necessity to shore up the solvency of social security is indisputable. According to the Chief Actuary for the Social Security Administration, the unfunded liabilities for the system are $4 trillion over the next seventy-five years. The cause of the problem is demo- graphic change and the pay-as-you-go structure of the social security system. As the baby boom generation retires, the ratio of workers to beneficiaries will fall to 2 to 1 over the next forty years from the current 3.3 workers to 1 beneficiary. In 1930 the ratio was 41 to 1; in 1950 the ratio was 16.5 to 1.

If individuals saved their own money in personal accounts for retirement, then this demographic swing would not be a problem. However, the current system operates on a pay-as-you-go basis, where current workers pay for current retirees and the federal government facilitates this intergenerational transfer. Ideally, retirement benefits would not be held hostage to precarious demographic shifts or capricious politicians in Washington D.C. Personal accounts would substantially mitigate the political and demographic risks posed by the current system.

The philosophical principle of fairness for many liberal egalitarian philosophers, such as John Rawls or Ronald Dworkin includes some variation of the notion that distribution of goods should be based on ambition-sensitive but endowment-insensitive criteria. This means that people should be rewarded for working hard because it is within their control, but people should not be penalized for circumstances beyond their control.

Thus, it is unfair to persist with a system that subjects entire generations of people and their retirement benefits to the fluctuations of demography and politics when this need not be the case. One cannot escape the fluctuations of the economy as a whole because both government tax revenue, which pays social security, and individual portfolio investments, which would constitute personal retirement accounts, are dependent on overall economic growth.

However, most experts acknowledge that adopting personal accounts by themselves and reducing benefits commensurately, such that no one is worse off, would not be sufficient to solve the solvency problem. One proposal, which President Bush has endorsed, to help address the solvency problem is called progressive indexing. This proposal would change the formula for benefit increases by reducing the rate of growth of benefits for middle and high income earners.

Progressive indexing would index the growth of benefits to price growth rather than wage growth for high income earners because price growth is generally slower than wage growth. Middle income earners’ benefits would be indexed to a combination of the two, and lower income earners’ benefits would be indexed entirely to wage growth, which is the way indexing is currently done. Thus, the redistributive aspect of the social security system would increase. Liberal egalitarians who support equal outcomes should embrace progressive indexing.

If immediate solvency for social security is not the reason for personal accounts, what is the real benefit? The real benefit of personal accounts, from the perspective of liberal egalitarians and compassionate conservatives, is the empowerment of the poor or the least advantaged members of society, as philosopher John Rawls might put it. The first benefit to the poor is the chance for higher returns from investing in capital markets rather than relying on unreliable government transfers. Another benefit is freeing poor people to accumulate bequeathable wealth, which can help break cycles of poverty within families. Low income people would then be able to pass on their leftover savings to their children when they pass away themselves.

Some fear that personal accounts would bring market risk into the sys- tem. The claim is true, but the fear is misplaced. There are many ways of mitigating risk in personal accounts. Maintaining a diverse portfolio with both stocks and bonds and other asset classes such as real estate is one way of reducing risk. Making regular investments over a long time horizon to take advantage of dollar cost averaging is another way of reducing risk. Automatic rebalancing to include more bonds and less stock in an individual’s portfolio for individuals approaching retirement would also help reduce risk. Given how easily the risk can be managed, there is no reason for anyone to fear market risk.

Social security has ballooned into something beyond a basic safety net and is likely crowding out private retirement savings. Viewing social security as primarily a safety net insurance scheme is extremely misleading. Insurance is used to cope with the inherent uncertainty of outcomes which can cause acute financial strain at unknown points of time in the future, such as car insurance for car accidents. Retirement, with the associated financial strain of having one’s income from work decrease to zero, is a relatively certain outcome for all workers. Thus, individuals are well suited to cope with this eventuality through saving and investing.

There is no reason that social security reform need undermine the safety net aspect of the current system. For those who lack sufficient savings due to insufficient income during their lives, the social security system might be an appropriate mechanism for the provision of welfare during old-age. However, most people could responsibly save for retirement throughout their working lives and be less dependent on government if given the chance to invest with personal accounts. The poor would certainly be made better off with personal accounts as part of social security reform, and that ought to be a compelling reason for liberal egalitarians to support the proposal.