The Case Against Privatizing Social Security

Five Reasons Why We Must Protect the Security of Social Security… and Why Those Who Say Privatization is the Answer are Dead Wrong

Reason #1: There is no "free lunch." Privatizing Social Security comes with higher risk.

Reason #2: If we privatize Social Security, your decision to retire will be held hostage by whether the stock market is up or down.

Reason #3: Social Security is an insurance program; it should not be a risky investment plan.

Reason #4: We would have to take on huge national debt in order to privatize Social Security.

Reason #5: Don't trust Wall Street Welfare Kings with your retirement security.

Reason #1: There is no "free lunch." Privatizing Social Security comes with higher risk.

The bottom line is that, higher average returns in the stock market come with higher risk. And In fact, those earning the least, those who need social security insurance the most, "face the highest level of risk(Washington Post, 2/18/2005)."

Jim VandeHei, staff writer at the Washington Post, explains that, privatization advocates like stressing 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. However, even if the overall performance of the current stock market was generally positive, which is clearly not always the case, "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. Research by Princeton University economist Burton Malkiel found that even professional money managers over time significantly underperformed indexes of the entire market (Washington Post, Feb18)."

Americans depend on Social Security to protect them against forces they cannot control – economic ups and downs, fluctuating investment markets, disability and/or premature death of family members – Putting that security at risk, defeats the whole purpose of social security.

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Reason #2: If we privatize Social Security, your decision to retire will be held hostage by whether the stock market is up or down.

Greg Anrig, Bernard Wasow of the 20th Century Foundation explains that, "In the 20th century, when stocks generally grew significantly, there were three 20-year periods over which the market either declined or did not rise. The volatility of investment markets means that it matters a great deal whether you retire during an upswing or downturn. For example, a worker who invested his or her retirement fund in a stock portfolio that matched the Standard & Poor's 500 index and cashed out upon retirement in March 2000 would have a nest egg almost a third larger than someone who retired just a year later using exactly the same investment strategy. Of course, that is because the stock market plunged over those 12 months (Twelve Reasons Why Privatizing Social Security is a Bad Idea, Social Security Network).

On September 29, 2008 the stock market lost $1.2 trillion of value in a single day (Money, 9/29/2008).

What if you were planning to retire this month? What if you had most of your money invested in a securities company like Bear Sterns or Lehman Brothers? Many people saw much of their retirement security slip a way in a matter of days.

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Reason #3: Social Security is an insurance program; it should not be a risky investment plan.

Jason Furman of the Center on Budget and Policy Priorities explains that Social Security is more than just a retirement plan. "One-third of social security payments go to survivors insurance and disability insurance benefits. Equivalent products would be extremely expensive in the private market, if they could be purchased at all in the market."

But most importantly, even if there was low risk in investing in private securities (which this week's events clearly illustrate, there is not), "insurance is not something from which people seek positive 'rates of return.' No one would decide not to buy fire, automobile, or health insurance because those products generally produce a lower rate of return than investing in funds. For most people, these types of insurance generally have a negative rate of return: most people pay premiums for these types of insurance and do not expect to get all of their money back. Yet these types of insurance products are greatly desired, because they can be extremely valuable in circumstances when an individual or family meets major misfortune and needs very large amounts of financial assistance as a consequence (Center on Budget and Policy Priorities, 6/2/2005)."  

We must not gamble with our national insurance program. It is our collective responsibility to protect Social Security so that it is there when Americans need it.

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Reason #4: We would have to take on huge national debt in order to privatize Social Security.

In order to transition to privatization the government would begin by diverting payroll taxes, which pay for current Social Security benefits, into personal investment accounts. The government, already running a deficit, would have to borrow a huge amount of money to make up the shortfall in payments (Paul Krugman, 12/10/2004).

According to a 2005 Center for American Progress analysis, "The plan would require borrowing an estimated $2.2 trillion in net present value (2002) to transition to private accounts with cuts to the disability program. Preserving disability benefits would require transferring $2.8 trillion today to cover, together with interest, all shortfalls over the next 75 years, resulting from the establishment of private accounts (Center for American Progress, 2005)."

The Center on Budget and Policy Predicts, "Privatization would explode the deficit, saddling our children with $4.9 trillion in debt in the first 20 years alone, mainly borrowed from foreign countries such as China and Japan," according to the Center on Budget and Policy Priorities.

Paul Krugman summed it up best when he wrote, the plan to fix social security through private accounts boils down to a plan to "borrow trillions, put the money in the stock market, and hope for the best (Paul Krugman, 12/10/2004)."

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Reason #5: Don't trust Wall Street Welfare Kings with your retirement security.

Brokerage houses, banks, and mutual funds have been very active in the campaign to privatize Social Security. Anrig and Wasow explain how that is a, “small wonder, since they stand to gain enormous fees if billions of dollars are shifted each year from Social Security payments into accounts under Wall Street management. Of course, those fees must come from somewhere, namely from the balances in individual accounts (Twelve Reasons Why Privatizing Social Security is a Bad Idea, Social Security Network)."

"Austan Goolsbee at the University of Chicago has written a study, "The Fees of Private Accounts and the Impact of Social Security Privatization on Financial Managers," which calculates that, "Under Plan II of the President's Commission to Strengthen Social Security (CSSS), the net present value (NPV) of such payments would be $940 billion," and, "amounts to about one-quarter (25%) of the NPV of the revenue of the entire financial sector for the next 75 years," and concludes that, "The fees would be the largest windfall gain in American financial history (Austin Goolsbee)."

In risky money making scheme, Wall Street executives and most of the major securities firms made the decision to take huge positions in sub-prime mortgages. The plan paid off for them beautifully, most of them walked away with tens of millions of dollars in 2006, and 2007. However, in 2008 the current housing crisis has brought down many of these firms and sent ripples throughout the world's economy. The tax payers are on the hook for billions of dollars to bail out America’s financial situation and many people have lost a huge amount of personal wealth and financial security in just the last 6 months. Main Street is feeling the pain for the mismanagement and negligence of Wall Street (see Welfare Kings of Wall Street).

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Conservatives Said Privatizing Social Security Would Not Be Risky...
Wrong again!

Jan 13, 2005
Vice President Cheney: "Voluntary personal accounts would represent an entirely prudent risk."

April 25, 2005
President Bush: "Because this money is saved and invested, younger workers would have the opportunity to receive a higher rate of return on their money than the current Social Security system can provide."

February 2, 2005
President Bush: "Here's why the personal accounts are a better deal. Your money will grow, over time, at a greater rate than anything the current system can deliver – and your account will provide money for retirement over and above the check you will receive from social security."

Background
The securities industry and current welfare kings of Wall Street stood to gain from a great deal of wealth from the infusion of capital that this would bring to the market. To support this effort, Republican donors were asked to help raise between $50 and $100 million for a campaign in support of the proposal, with contributions expected from groups like the conservative Club for Growth and the securities industry that stood to gain so much from privatization (Molly Ivins).