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May 26, 2015

The Private Sector Can Reform Social Security's Disability Program


As Republican presidential candidates look for policy reform proposals for their campaign platforms, let’s hope they reach out for bold, free market ideas. And Social Security is a good place to start. 

Since President George W. Bush’s administration lost faith in its own Social Security reform effort in 2005 in the face of demagoguery by Democrats, Republicans have mostly proposed tweaking the status quo by raising the retirement age or cutting benefits. New Jersey Governor Chris Christie, a possible Republican presidential candidate, was the latest to trot out a version of this approach.
Here’s a bolder option: Turn Social Security’s disability insurance and survivorship programs over to the private sector.
As the Institute for Policy Innovation explains in a new publication, three Texas counties did exactly this nearly 35 years ago. It’s part of what is known as the Alternate Plan, and it essentially replaced Social Security’s three basic programs— retirement income, disability and survivorship.
The best part of the Alternate Plan is providing county workers with a personal retirement account that replaces Social Security’s retirement income provision. But transitioning to personal accounts is a financial challenge because current workers’ 12.4 percent payroll tax goes to paying current retirees. If workers began diverting part or all of their payroll tax into a personal retirement account, the government would have to find some other way to fund current retirees’ income benefits.
But Social Security’s disability program is different. Current workers could choose from several federally qualified, private sector disability insurers, and a portion of their payroll tax which covers disability benefits would then pay the cost of a private sector disability policy.
Insurers choosing to participate would have to accept those already receiving disability benefits, just as Obamacare required private health insurers to accept any applicant regardless of health status.
The Alternate Plan also provides significantly better benefits for disabled workers. And those workers who die have a life insurance policy that pays four times the worker’s salary, up to $215,000. While Social Security provides survivorship benefits in certain cases, the standard death benefit is $255.
The boldest reform proposal would transition all three Social Security programs to the private sector. But if that is too much, starting with disability and survivorship would be a good first step.


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