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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. The pro and con arguments and quotations (from editorials, op-eds, and political statements) are outlined below.

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 vulnerable to downturns 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 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.
  • 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 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.
  • Fees on Soc Sec accounts diminish value of privatization. Greg Anrig and Bernard Wasow. "Twelve reasons why privatizing social security is a bad idea." The Century Foundation: "University of Chicago economist Austan Goolsbee has calculated that the costs of privately managed individual accounts are likely to reduce the ultimate retirement value of the accounts by 20 percent.13 He found that commissions, fees, and other costs would absorb nearly $1 trillion over seventy- five years—money that otherwise would go to beneficiaries. larger share of today’s workers would confront large benefit cuts than if no changes were made. Experience in the United Kingdom offers a warning about what the future could bring regarding management costs. Workers there have been allowed to open private accounts starting in 1988, since which time management fees and marketing costs among financial intermediaries have eaten up an average of 43 percent of the return on investment."
  • 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").
  • Advocates of privatization overestimate performance of accounts. Eliot Spitzer. "Can we finally kill this terrible idea?" Slate. February 4th, 2009: "Furthermore, as Paul Krugman has pointed out, the would-be privatizers make incredible—even impossible—assumptions about the likely performance of the market to justify their claim that private accounts would outdo the current system. According to Krugman, their worldview would require the price-earnings ratio in the market to be around 70 to 1 by midcentury. That would make the market at the height of the last bubble look grossly undervalued. Their performance numbers simply do not work."
  • Privatization would not increase capital for investment. Eliot Spitzer. "Can we finally kill this terrible idea?" Slate. February 4th, 2009: "And that fact makes clear the fallacy of the next argument often proffered by privatization supporters: They claim that the flow of dollars into the private accounts and then into the equity markets will stimulate the economy. The problem is that for every dollar put into the market through a private account, the government would have to borrow a dollar in the market to cover existing payouts. Thus the supposed benefit is entirely eliminated, as the net impact on the capital available for investment is zero."


Personal wealth: Will privatization improve private 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

  • Odds against individuals investing retirement accounts wisely Greg Anrig and Bernard Wasow. "Twelve reasons why privatizing social security is a bad idea." The Century Foundation: "Reason #5: The odds are against individuals investing successfully."]: "Privatization advocates like to stress the appeal of 'individual choice' and 'personal control,' while assuming in their forecasts that everyone’s accounts will match the overall performance of the stock market. But studies by Yale economist Robert J. Shiller and others have demonstrated that individual investors are far more likely to do worse than the market generally, even excluding the cost of commissions and administrative expenses. Indeed, research by Princeton University economist Burton G. Malkiel found that even professional money managers over time significantly underperformed indexes of the entire market." [read extended quoted in argument page.]
  • 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.
  • 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.


Liberty/ownership: Does privatization improve individual liberty?

Pro


Con

  • Private accounts would require costly new govt bureaucracy. Greg Anrig and Bernard Wasow. "Twelve reasons why privatizing social security is a bad idea." The Century Foundation.: "REASON #8: PRIVATE ACCOUNTS WOULD REQUIRE A NEW GOVERNMENT BUREAUCRACY. From the standpoint of the system as a whole, privatization would add enormous administrative burdens. The government would need to establish and track many small accounts, perhaps as many accounts as there are taxpaying workers—147 million in 1997. Many workers’ accounts would be so small that they would be of no interest to profit-making firms. The average taxable earnings of a worker are roughly $25,000 (in 1997, the last year with complete data, the average taxable earnings of the workers who paid into the system were $22,400). Two percent of $25,000 comes to $500 per year. Francis X. Cavanaugh, who has supervised the thrift savings program for federal employees, a program that privatization advocates often point to as a model, has argued thatthe costs of administering so many small accounts would overwhelm any benefits to be gained from the stock market.14 For example, he estimates that the government would need to hire ten thousand highly trained workers just to oversee the accounts and answer questions from workers. In contrast, today’s Social Security has minimal administrative costs amounting to less than 1 percent of annual revenues."

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

  • 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

Case studies: Has privatization worked elsewhere?

Pro

Con

  • Privatization of Soc Sec has disappointed in most places Greg Anrig and Bernard Wasow. "Twelve reasons why privatizing social security is a bad idea." The Century Foundation: "Reason #4: privatization has been a disappointment elsewhere.": "Advocates of privatization often cite other countries, such as Chile and the United Kingdom, where the governments pushed workers into personal investment accounts to reduce the long-term obligations of their Social Security systems, as models for the United States to emulate. But the sobering experiences in those countries actually provide strong arguments against privatization. A report last year from the World Bank, once an enthusiastic privatization proponent, expressed disappointment that in Chile, and in most other Latin American countries that followed in its footsteps, “more than half of all workers [are excluded] from even a semblance of a safety net during their old age.” [read extended quote in argument page].


Public support:

Pro

Con

  • Americans support increasing taxes to fund Social Security. Stephen Dick. "Op-Ed: Yes, leave Social Security alone." CNHI News Service. November 19th, 2010: "the American people, despite voting for Republicans, have said over and over in polls that they would pay more in taxes to save entitlements, such as Social Security and Medicare. With Republicans back in power, when it comes time to cut spending, they'll be looking at Social Security until the American people tell them to back off. "


Pro/con sources

Pro


Con


See also

External links and resources


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