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Debate: Privatizing social security

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Should social security be privatized?

Background and context

Social Security is a social insurance program officially called "Old-Age, Survivors, and Disability Insurance" (OASDI), in reference to its three components. It is primarily funded through a dedicated payroll tax. During 2008, total benefits of $625 billion were paid out versus income (taxes and interest) of $805 billion, a $180 billion annual surplus. An estimated 162 million people paid into the program and 51 million received benefits, roughly 3.2 workers per beneficiary.

Due to projected difficulties with social security programs, many have argued, including former president Bush, that social security should be privatized (at least partly). This is a situation in which individuals are given subsidized personal accounts ("individual accounts" or "private accounts") through partial privatization of the system. President Barrack Obama "strongly opposes" privatization.

Economic growth: Does privatization improve economic growth?

Yes

  • Privatization gives investment decisions to account holders. "LETTER: We should privatize Social Security." Wausau Daily Herald. October 25th, 2010: "Additionally, the scare tactics of Feingold make it sound like the Social Security money those under 55 invest would have to go to Wall Street. That is not the case at all. The investment choices could be desigend so they would be at the individual's discretion. For those who feel the government can do a better job of investing their money than they themselves can, I would encourage them to give thought to allowing the government to handle not only the money they have contributed to their Social Security, but all of their savings as well. With its record of mismanagement, and a $14 trillion deficit, forgive me if I am not going to stand in line to join in."
  • Private accounts prevent politicians taking from social security. Andrew Roth. "Privatize Social Security? Hell Yeah!" Club for Growth. September 21, 2010: "Fiscal conservative candidates should embrace it. While Americans in retirement or approaching retirement would stay in the current system, younger workers should have the option to invest a portion of their money in financial assets other than U.S. Treasuries. These accounts would be the ultimate "lock box" - they would prevent politicians in Washington from raiding the Trust Fund. The truth is that taxpayers bailout politicians every year thanks to Social Security. Congress and the White House spend more money than they have so they steal money from Social Security to help pay for it. That needs to stop and there is no responsible way of doing that except with personal accounts."
  • Privatizing social security offers ownership in economy. Michael Tanner. "Privatizing Social Security: A Big Boost for the Poor." CATO. July 26th, 1996: "An important side benefit of Social Security privatization is that it would give every American--including poor Americans--an opportunity to participate in the economy by owning a part of it. In effect, a privatized pension system would act as a nationwide employee stock option plan, which would allow even the poorest workers to become capitalists. Through Social Security privatization, workers would become stockholders. The division between labor and capital would be broken down."
  • Social security is net loss for taxpayers and beneficiaries. Lawrence Kotlikoff. "Privatizing social security the right way." Testimony to the Committee on Ways and Means. June 3, 1998: "Social Security represents a bad deal for postwar Americans. Moreover, the deal has gotten worse over time. Baby boomers are projected to lose roughly 5 cents of every dollar they earn to the OASI program in taxes net of benefits. Generation X=ers and today=s children will lose over 7 cents of every dollar they earn in net taxes. These losses assume no adjustment to Social Security=s taxes or benefits. But, as indicated above, major adjustments are inevitable unless the system is privatized. If OASI taxes are raised immediately by the amount needed to pay for OASI benefits on an ongoing basis, baby boomers will forfeit 6 cents of every dollar they earn in net OASI taxes. Those born after the baby boom will forfeit 10 cents of every dollar they earn."


No

  • Privatized social security accounts are more risky. Most stock market experts will point out that the long-term return on stocks has always been positive, despite temporary setbacks now and then. In other words, the market may go up 150 percent one decade, then down 50 percent the next, then up 60 percent the next, then down 25 percent the next. Overall, the return may be positive, but what happens to the retirees that hit age 65 during one of the downturns? Hopefully they were wise enough to gradually put most of their money in safer investments, but there's no guarantee they did the right thing.
  • Privatization subjects social security to market fluctuations. Privatization converts the program from a "defined benefits" plan to a "defined contribution" plan, subjecting the ultimate payouts to stock or bond market fluctuations.
  • Privatization during economic crisis would have been disaster. Privatization in the midst of the greatest economic downturn since the Great Depression would have caused households to have lost even more of their assets, had their investments been invested in the U.S. stock market.
  • Privatized social security cannot be assured to beat inflation. Social Security payouts are indexed to wages, which historically have exceeded inflation. As such, Social Security payments are protected from inflation, while private accounts might not be.
  • Privatizing social security would wrongly enrich banks. Privatization would represent a windfall for Wall Street financial institutions, who would obtain significant fees for managing private accounts.
  • Plenty of ways to reform social security w/o privatization Robert L. Clark, an economist at North Carolina State University who specializes in aging issues, formerly served as a chairman of a national panel on Social Security's financial status; he has said that future options for Social Security are clear: "You either raise taxes or you cut benefits. There are lots of ways to do both."[1]
  • Privatization threatens disabled worker/family protections Greg Anrig and Bernard Wasow. "Twelve reasons why privatizing social security is a bad idea." The Century Foundation.: "Reason #1: Today's insurance to protect workers and their families against death and disability would be threatened. 'Rate of return' calculations neglect the value of Social Security’s insurance protections. Of the 47 million Americans who collect payments from the Social Security program, over one-third (almost 17 million) are not retired workers. Among those currently receiving Social Security payments are 5 million spouses and children of retired and disabled workers, 7 million spouses and dependent children of deceased workers, and 7 million disabled workers and their dependents. Proposals to privatize Social Security involve shifting some of the money financing the current insurance program into investment accounts assigned to each worker. But the payroll taxes carved out to pay for personal accounts are resources that are needed to support today’s payments to recipients of Social Security’s survivors and disability insurance as well as retirement benefits. Simple arithmetic suggests that every dollar shifted from Social Security programs to personal accounts is a dollar less to provide guaranteed income to the 37 percent of beneficiaries who are not retired workers. The three alternatives put forward in 2001 by the President’s Commission to Strengthen Social Security would, in the absence of individual accounts, restore long-term Social Security solvency either largely or entirely through benefit reductions that would apply to all beneficiaries— including the disabled. In the principal proposals put forward by the commission, the reduction in disability benefits was draconian, with cuts ranging from 19 percent to 47.5 percent after the year 2030." [read extended quote in argument page.]
  • Privatization would hasten depletion of soc. sec. trust funds. Greg Anrig and Bernard Wasow. "Twelve reasons why privatizing social security is a bad idea." The Century Foundation.: "Diverting up to four percentage points of the payroll tax to create private accounts as the president has proposed would shorten significantly the time until the Trust Funds become depleted. In part, this is because funds now being set aside to build up the Trust Funds to provide for retiring baby boomers would be used instead to pay for the privatization accounts. The government would have to start borrowing from the private sector almost immediately to be able to meet commitments to retirees and near-retirees. As Figure 1 shows, the Trust Funds would be exhausted much sooner than the thirty-eight to forty-eight years projected if nothing is done. In such a short time frame, the investments in the personal accounts will not be nearly large enough to provide an adequate cushion. The upshot: a much larger share of today’s workers would confront large benefit cuts than if no changes were made."


Ownership: Does privatization improve individual liberty?

Pro


Con

  • Privatization does not address long-term funding challenges. The program is "pay as you go", meaning current payroll taxes pay for current retirees. Diverting payroll taxes (or other sources of government funds) to fund private accounts would drive enormous deficits and borrowing ("transition costs").


Crisis? Is there a crisis requiring a response like privatization?

Pro

  • Social security unsustainable with retiring workforce. "Privatizing Social Security Still a Good Idea." San Diego Union Tribune: "The problem is that the system is unsustainable, as should be evident with the impending retirement of 70 million baby boomers - brought to you by smaller corps of younger workers who will be taxed to the gills to pay for it. Consider this: In 1946, the cost of supporting one retiree was divided between 42 workers. Now we're approaching the point where the cost of each retiree will be divided between only two workers. That is bound to put enormous strain on those workers. The real trouble begins in 2016 when - according to the experts - more will be going out in benefits than coming in as payroll taxes."
  • Social security is basically a giant ponzi scheme. "Why is Social Security often called a Ponzi scheme?" CATO Institute. May 11th, 1999: "Just like Ponzi's plan, Social Security does not make any real investments -- it just takes money from later 'investors,' or taxpayers, to pay benefits to earlier, now retired, taxpayers. Like Ponzi, Social Security will not be able to recruit new "investors" fast enough to continue paying promised benefits to previous investors. Because each year there are fewer young workers relative to the number of retirees, Social Security will eventually collapse, just like Ponzi's scheme."
  • Privatization is the least bad option. Lawrence Kotlikoff. "Privatizing social security the right way." Testimony to the Committee on Ways and Means. June 3, 1998: "As described above, the U.S. Social Security System is badly broke and is treating the vast majority of its current contributors very badly. Privatization is far from a painless panacea, but it does represent an opportunity to resolve, once and for all, most of the System's financial woes and to rationalize a program that is intragenerationally as well as intergenerationally highly inequitable, replete with inefficiencies and economic distortions, and extraordinarily uninformative about the benefits it is providing in exchange for its mandatory contributions."


Con

  • Social security not in crisis; no need for privatization Nobel Laureate economist Paul Krugman. "Inventing a crisis." New York Times. December 7th, 2004: "The grain of truth in claims of a Social Security crisis is that this tax increase wasn't quite big enough. Projections in a recent report by the Congressional Budget Office (which are probably more realistic than the very cautious projections of the Social Security Administration) say that the trust fund will run out in 2052. The system won't become "bankrupt" at that point; even after the trust fund is gone, Social Security revenues will cover 81 percent of the promised benefits. Still, there is a long-run financing problem. But it's a problem of modest size. The report finds that extending the life of the trust fund into the 22nd century, with no change in benefits, would require additional revenues equal to only 0.54 percent of G.D.P. That's less than 3 percent of federal spending - less than we're currently spending in Iraq. And it's only about one-quarter of the revenue lost each year because of President Bush's tax cuts - roughly equal to the fraction of those cuts that goes to people with incomes over $500,000 a year. Given these numbers, it's not at all hard to come up with fiscal packages that would secure the retirement program, with no major changes, for generations to come."
  • Budget shortfall has more to do with misguided tax cuts, spending. Nobel Laureate economist Paul Krugman. "Inventing a crisis." New York Times. December 7th, 2004: "It's true that the federal government as a whole faces a very large financial shortfall. That shortfall, however, has much more to do with tax cuts - cuts that Mr. Bush nonetheless insists on making permanent - than it does with Social Security. But since the politics of privatization depend on convincing the public that there is a Social Security crisis, the privatizers have done their best to invent one."
  • Opponents use twisted logic on social security surplus/deficit. Nobel Laureate economist Paul Krugman. "Inventing a crisis." New York Times. December 7th, 2004: "My favorite example of their three-card-monte logic goes like this: first, they insist that the Social Security system's current surplus and the trust fund it has been accumulating with that surplus are meaningless. Social Security, they say, isn't really an independent entity - it's just part of the federal government. If the trust fund is meaningless, by the way, that Greenspan-sponsored tax increase in the 1980's was nothing but an exercise in class warfare: taxes on working-class Americans went up, taxes on the affluent went down, and the workers have nothing to show for their sacrifice. But never mind: the same people who claim that Social Security isn't an independent entity when it runs surpluses also insist that late next decade, when the benefit payments start to exceed the payroll tax receipts, this will represent a crisis - you see, Social Security has its own dedicated financing, and therefore must stand on its own. There's no honest way anyone can hold both these positions, but very little about the privatizers' position is honest. They come to bury Social Security, not to save it. They aren't sincerely concerned about the possibility that the system will someday fail; they're disturbed by the system's historic success."

Voluntary: Will private accounts be voluntary? A good idea?

Pro

  • Private social security accounts are voluntary. Andrew Roth. "Privatize Social Security? Hell Yeah!" Club for Growth. September 21, 2010: "Democrats will say supporters of personal accounts will allow people's fragile retirement plans to be subjected to the whims of the stock market, but that's just more demagoguery. First, personal accounts would be voluntary. If you like the current system (the one that is raidable by politicians), you can stay put and be subjected to decreasingly low returns as Social Security goes bankrupt. But if you want your money protected from politicians and have the opportunity to invest in the same financial assets that politicians invest in their own retirement plans (most are well-diversified long term funds), then you should have that option."


Con

Personal Wealth

Yes

  • Social security taxes damage ability of poor to survive. Americans living at the poverty level must usually spend every cent of their disposable income just to survive. Few in the lower-middle class have the funds available to put into a wealth-generating retirement account. Thus, they must rely on social security income to pay the bills when they reach retirement age. Unfortunately, the current social security payouts are at or below the poverty level. The money you earn in benefits based on what you pay in is less than what you'd earn in a passbook savings account.
  • Privatizing social security helps the poor. Michael Tanner. "Privatizing Social Security: A Big Boost for the Poor." CATO. July 26th, 1996: "Critics of Social Security privatization often warn that such proposals hold serious dangers for the elderly poor. However, a closer examination of the evidence indicates that the poor would be among those who would gain most from the privatization of Social Security. By providing a much higher rate of return, privatization would raise the incomes of those elderly retirees who are most in need. Although the current Social Security system is ostensibly designed to be progressive, transferring wealth to the elderly poor, the system actually contains many inequities that leave the poor at a disadvantage. For instance, the low-income elderly are much more likely than their wealthy counterparts to be dependent on Social Security benefits for most or all of their retirement income. But despite a progressive benefit structure, Social Security benefits are inadequate for the elderly poor's retirement needs."

No

  • Privatized social security will cut tax revenues and social services. We all know that the social security system is severely underfunded; it's headed for bankruptcy sometime in the 2040s. Implementing private accounts will take 4 percent of the 12.4 percent taxes from every worker out of the trust fund. Thus, almost a 3rd of the revenue generated by social security taxes will be removed. Drastic benefit cuts or increased taxes will have to occur even sooner, which is a recipe for disaster.


Case studies: Has privatization worked elsewhere?

Pro

Con

Public support:

Pro

Con

Pro/con sources

Pro


Con


See also

External links and resources


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