Social Security Privatization Debate and Poll
Do you support the Privatization of Social Security? 


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Do you support the Privatization of Social Security?


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As envisioned by most supporters, a privatized Social Security system would essentially be a mandatory savings program. The 10.52 percent payroll tax that is the combined employer-employee contribution to the Old-Age and Survivors Insurance (OASI) portion of the Social Security program would be deposited in a personal security account (PSA) chosen by the individual employee. PRAs would operate much like current Individual Retirement Accounts (IRAs) or 401(k) accounts. Individuals could not withdraw funds from their PSAs before retirement, determined either by age or by PSA balance requirements. PSA funds would be the property of the individual, and upon death, any remaining funds would become part of the individual's estate. Individuals would be free to choose the fund manager that best met their individual needs and could change managers whenever they wished. The government would establish regulations on portfolio risk to prevent excessive speculation and protect consumers. Reinsurance mechanisms would be required to guarantee fund solvency.



In a 1995 study for the Cato Institute, financial analyst William Shipman of State Street Global Advisors compared the Social Security benefits that an individual is scheduled to receive under current law with the potential return that the individual would received if he or she had been allowed to invest an amount equivalent to the OASI portion of payroll taxes in either stocks or bonds. Shipman found that the 25-year-old low-wage worker described above is scheduled to receive Social Security benefits of $769 (1995 dollars) per month upon retirement at age 67. However, if that young worker were allowed to invest his payroll taxes in bonds, he would be able to purchase an annuity upon retirement that would provide benefits of $1,085 per month, assuming that the average performance of the bond market over the next 40 years remains approximately the same as the average over the last 60 years. Again assuming historic rates of return, investing in stocks would provide that worker with benefits of $2,419 per month (Figure 2).



In contrast to the current system, a privatized Social Security system would significantly increase savings, investment, and economic growth. The movement of so much capital into private markets would have a significant impact on economic growth. Martin Feldstein, for example, estimates that "the combination of the improved labor market incentives and the higher real return on savings has a net present-value gain of more than $15 trillion, an amount equivalent to 3 percent of each future year's GDP forever." Look, for example, at what happened in Chile after that country successfully privatized its pension system in 1981. As Robert Genetski, former chief economist at Chicago's Harris Bank, points out, "The buildup of funds in the workers' retirement accounts has produced a 29% savings rate. . . . Instead of resenting the rich, Chile's workers themselves are becoming rich." The cumulative assets handled by Chile's fund managers exceed $23 billion, or roughly 41 percent of GDP. During the past decade Chile's real GDP growth has averaged over 7 percent, more than double that of the United States. Privatizing the Social Security system can have the same beneficial economic impact here. Although all Americans will benefit from increased savings, investment, and economic growth, the poor will be among those receiving the biggest boost.



Two conservative think tanks, with funding from investment firms with plenty to gain from a privatized system, have worked hard, and effectively, to undermine the loyalty of the U.S. public, and politicians. If Social Security as we know it is cast off like a rejected first wife by this Congress, it will be because of the slow but steady deterioration of public support over more than a decade. It became obvious that privatization would not receive substantial public support until the public's faith in the Social Security system had dramatically eroded but to do that the public needed to be convinced that there was a crisis, not in some far future time, but now. And so, the "fact" that Social Security was going broke, or was already bankrupt, became a recurring theme trumpeted by the pro-privatization pundits of the Heritage Foundation and the Cato Institute.



If necessary, the government could continue to provide a minimum safety net, through either a guaranteed minimum benefit or a floor benefit. Under a guaranteed minimum benefit, if upon retirement the balance in an individual's PRA were insufficient to provide an actuarially determined retirement annuity equal to a minimum benefit--for example, a benefit equal to the minimum wage--the government would provide a supplement sufficient to bring the individual's monthly income up to the level of the minimum wage. A floor benefit would provide a minimum standard flat benefit to all retired Americans regardless of income.



The Heritage and Cato estimates also ignore another major factor: Social Security taxes don't only pay for our retirement, they also help to support children whose working parents have died, as well as widows and severely disabled individuals who are unable to work to support themselves. These are the people who most desperately need Social Security, but the pro-privatizers hope that nobody will notice that their economic security isnít even mentioned in the reform plans--and on this point, the privatizers have usually been right.



What happens when your savings runs out? What happens if your husband chooses not to share his personal savings account with you? What if inflation spirals out of control and much of the value of personal savings is eroded?  What if your spouse was a foolish investor? What if the stock market crashes and loses value at about the time you want to retire? 



Wall Street brokerage houses stand to gain billions in brokerage fees. One projection, as reported by the Washington Post (Jan.7, 1997), indicated that $240 billion in fees would be diverted to investment firms during the first 12 years of privatization. At the same time, retirees would see their income cut by up to 20 percent to cover those fees and administrative costs. Current benefit levels would inevitably be cut; every privatization bill introduced in the last Congress raises the retirement age to 70 or higher, cuts guaranteed benefits and cuts cost-of-living increases. Supplanting Social Security with private investment accounts also risks losses in the event of substantial declines in financial markets or a serious economic recession.



Advocates of privatization, also assume that a privatized retirement system would be more efficient and cost-effective than a government managed program. In reality, Social Security's administrative costs are about one percent of incoming revenues. In comparison, the Chilean system, which is often cited as a model for privatizing Social Security, has administrative costs that average about thirteen percent of worker contributions. In Great Britain, administrative costs consume up to twenty percent of contributions.

CON 10
The tremendous transition costs of completely privatizing Social Security would be extremely difficult. Essentially, anyone currently in the workforce would be required to pay twice. Today's workers would be required to make contributions to their private accounts while continuing to pay current beneficiaries. Either taxes would have to be increased significantly, massive new government debt incurred, or benefits would have to be dramatically scaled back. For example, one proposal to divert 5 percent of earnings from Social Security to private accounts would require a payroll tax increase of 1.52% AND $1.2 trillion in new government borrowing. A recent study the National Committee commissioned from noted economist John Mueller shows that once the transition costs are factored in, nearly everyone currently alive would face retirement with fewer benefits under a partially or totally privatized system.


CON 11

Wall Street firms are pushing hard for privatization of the Social Security system. If successful, they stand to gain an estimated $60 billion a year in new assets flowing into the mutual fund industry. Wall Street is a master of the most popular political investments in Washington today Ė special-interest PAC contributions to politicians and huge soft money donations to the political parties. A Common Cause analysis shows the securities industry invested $15.5 million in PAC contributions to candidates and $37.4 million in soft money contributions through the political parties during the past decade.



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