Social Security Privatization Considered

The privatization program for Social Security proposed (not really, there are very few details about the plan available) would be tantamount to the destruction of Social Security with a huge payoff to those companies providing the financial consulting on the accounts and for those people who already hold stocks (mostly the very wealthy). First, the plan to “save” Social Security would not do anything to improve its financial position. Even an anonymous White House official has said that the proposed changes to Social Security would have a neutral effect upon the finances of it. Thus, the first rationale is debunked. Secondly, the benefactors of Social Security would get a raw deal from the private accounts. In order to earn much of anything, they would need to get high returns, which would entail high risk. In a group as large as the group of Americans who receive Social Security, there would be a large number of people who lose their entire retirement savings under the plan. The Administration’s solution would be to only allow investment in a few conservative low-risk mutual funds. The low risk would translate into low returns. Thus retirees would get little out of the plan above what they get under the current Social Security program and there would be higher risk; even low-risk mutual funds are more riskier than Treasury bills, which is what drives the returns in Social Security today. Furthermore, in a private accounts plan, there would be significantly higher administrative fees (currently, the administrative costs are less that 0.5%), which would cut further into the returns. Finally, the Administration’s plan calls for cutting benefits, which would make the plan little more than a loan. Even under this analysis (which ignores the $2 trillion dollars of extra government borrowing just in the next 10 years; over the next 40 years it would be closer to $10 or $15 trillion), the benefits of private accounts are scant and the extra risk probably negates any expected monetary gain under the plan.
However, not everyone would lose. The large Wall Street financial firms would make a killing in the administrative fees they would charge on millions of new accounts. Additionally, those already holding stocks (as I said before, mostly the wealthy) would get an instant benefit in terms of appreciation of their holdings due solely to the huge inflow of money into the stock market. It seems totally inappropriate and dangerous to privatize Social Security. Another way that would actually help Social Security’s financial position would be to increase the cap on income that is taxed for Social Security from roughly $80,000 to $120,000 or $140,000 and raise the low end from $0 to $20,000 or $30,000 to make the collection of payroll taxes more progressive. This would be a far safer and more effective way of extending the life of Social Security than privatization and would also increase the equity of the program.