Don't Blow Away
Social Security
continued from main story, page one
What's
Wrong with
Privatizing Social Security?
1. The stock market is volatile.
The stock market goes up and up. And sometimes it goes down and down. Even
without an economic catastrophe, the stock market’s volatility would make our
retirement income entirely unpredictable. Dean Baker has noted that if the economy grows
as slowly as the Social Security trustees are predicting, then the prognosis for the stock
market isn’t too rosy either. Social Security barely covers seniors’ expenses as
it is now.
Former Congressional Budget Office director Robert Reischauer has pointed
out that if we had private Social Security accounts back in 1969, a person retiring in
that year would have had a 60 percent larger payout upon retirement than someone retiring
seven years later, after the market dipped. John Mueller, a former economic advisor to the
House Republicans, makes a similar observation: Since 1900, he notes, there have been
three 20-year periods in which returns on the stock market fell to about zero. In between
were periods of positive returns. "This meant that some people earned a negative real
return from investing in the stock market, while others received a real pretax return as
high as 10 percent." For retirees, it would be the luck of the draw.
Under our current system, the government bears the risk of economic
downturn, and we’re all promised a constant monthly amount of retirement income.
Under a privatized system, we each individually bear the risk. Even the cleverest investor
will likely lose money in a major financial downturn. And not all of us are so clever
— or can afford to spend our time playing amateur Wall Street trader.
2. Shifting to a privatized system would require a hugely
expensive period of transition.
Say we begin establishing private Social Security accounts for all of us
Americans who are currently working and under 65. Who will generate funds to cover the
current retirees? You and me. Essentially, the next several generations of Americans would
have to pay twice — once into our own fund, and again to sustain current retirees.
According to one estimate, full-scale privatization of Social Security would require about
$6.5 trillion in additional taxes over the next seventy-two years. The Employee Benefits
Research Institute estimates that transition costs could amount to something like 5
percent of the nation’s Gross Domestic Product for the next 40 years. By instituting
privatization, we’d be starting a Social Security crisis, not ending one.
3. Maintaining private accounts will be costly.
Many of us tend to think that any federal program must be incredibly
inefficient and bureaucratic. A Roper poll asked Americans to estimate the administrative
costs of Social Security as a percentage of benefits. They guessed, on average, 50
percent. The real answer is one percent. Only one percent of the money that goes into
Social Security is spent on administration. By comparison, the administrative costs for
private insurance are about 13 percent of annual benefit amounts.
The main reason Social Security administration is so cheap is that the
whole fund is invested in one place, the U.S. Treasury. Imagine instead the administrative
cost of managing millions of separate accounts invested in a myriad of stocks and bonds.
Much of the money would go to Wall Street investment houses — which is why they like
the privatization idea so much.
In Chile, which privatized its retirement system in 1981, people pay
between 10 and 20 percent of their annual retirement contribution just to maintain their
account. The stock market would have to perform spectacularly to make up for that kind of
expense.
What's
Wrong with
Investing the Social
Security Fund in Stocks?
Clinton and others are advocating that part of the Social Security
system’s extra money be invested in the stock market instead of the Treasury, hoping
that it would collect more interest there. Because the money would still stay in one big
lump, the administrative costs wouldn’t stack up the way they would if everyone had
their own account.
But again, the stock market is volatile. There’s no guarantee that
the gamble would pay off.
Dean Baker and others also worry that investing the Social Security Fund
in the stock market just opens the door to further privatization. "I think it plays
into the hands of people who want individual accounts," he says. "It logically
leads people to believe that there’s a fortune to be made in the stock market. And if
there’s a fortune to be made, well then, let me get access to that as an individual.
But in fact, there isn’t a fortune to be made, because they’ve overestimated the
returns."
As it happens, financial institutions hate this aspect of Clinton’s
plan. If dollars are going to be invested in the stock market, they want to get a cut. But
that won’t happen if the government does the investing in one big lump. Financial
types have also complained about the "danger" of having the government
controlling such a big chunk of change on Wall St.
Because so much of the Social Security reform debate is being driven by
Wall Street, Baker believes this plan isn’t going anywhere. And he’s glad.
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