An analyst's case for leaving Social Security alone
In the months ahead, Americans can expect to be bombarded by charges that Social Security is a lousy deal. Wall Street is raising millions for an ad campaign promoting at least partial privatization of the nation's public pension system.
With President Bush's Social Security commission getting under way last week, these financial firms will step up their drive for a plan that would use Social Security revenues to create personal investment accounts - a possibility that could boost their profits.
They will try to persuade younger people that if they were allowed to invest part of their payroll taxes in stocks and bonds, they would get a higher return.
But claims of high returns are "misleading," says Yale University economist John Geanakoplos, adding that the 25-year-old, upwardly mobile women that pro-privatization forces target may benefit least.
Here's the argument:
First, pro-privatization groups often talk of the return on Social Security taxes being less than 2 percent a year for younger people. That compares with a 4 percent return after inflation if the money were instead invested in bonds and 6 or 7 percent, in the long run, in stocks. But such analyses often ignore the social-insurance aspect of the system.
Social Security provides modest monthly payments to the disabled and to spouses with children when the family breadwinner dies. By spreading such risks over the entire working population, Social Security keeps down the cost of coverage.
"This is worth something," says Mr. Geanakoplos.
If private firms offered disability insurance, they would cherry-pick customers to keep premiums down. No seriously sick people would get insurance.
Social Security also redistributes income from the prosperous to the poor. The pension benefits of those with low incomes are higher than their payments would justify, and vice versa for high-income people.
Second, Social Security is a pay-as-you-go system. At present, the trust fund contains a surplus. But, in general those who are working pay the pensions of those who are retired.
The problem is that the elderly of past generations got a staggering $10 trillion in windfall benefits (a nice return!). Their contributions, starting in 1937, came nowhere near covering their retirement benefits.
Only now have most new retirees paid enough into the system to cover fully their retirement benefits.
Younger workers, when they retire decades from now, will get a low return on their payments.
Alternatively, the working generation might have let poorer parents starve or face extremely hard times. Or, as Robert Friedland, director of the Center on an Aging Society in Washington puts it: Workers decided to "keep their mother-in-law from moving in with them." Retirees on Social Security could afford to live in their own quarters.
The key to this issue is the fact that the $10 trillion "loss" in the system doesn't disappear. It must be covered by each working generation - up to some 12 percent of their income. That obligation won't vanish with privatization. You promise to support your father in exchange for an implicit promise that your children will support you at retirement.
If President Bush and Wall Street persuade the nation to privatize, they will shut down the old system for younger workers and pay benefits of retirees from other government revenues.
Younger workers may enjoy a higher return on their individual Social Security accounts invested in stocks and bonds. But that gain would be offset by higher regular taxes, instead of payroll taxes. They won't escape that burden - unless they're willing to let their parents suffer with lower benefits.
"Essentially correct," says Michael Tanner, head of the Cato Institute's pro-privatization project. But "going forward," privatization would avert piling up more debt. And cutting other government outlays rather than benefits could cover the cost.
Also, higher returns on private accounts come with greater risk.
Geanakoplos says his father's private retirement plan, invested in stocks in a teachers' pension system, lost a third of its value last year in the market tumble. His pension was cut proportionately.
As for the ambitious career woman, she likely has enough income to invest separately in stocks. Her problem is that a privatized Social Security system would put billions of new money into stocks. This could cause stock prices to spike, but offer no guarantee of their long-term return outside and inside her Social Security account.
Those 50 percent of Americans not invested in stocks, most with low incomes, might benefit if some money were set aside for them in stocks. Geanakoplos would prefer this to happen, however, by adding a private account on top of the regular Social Security system - not subtracting revenues from it as Bush proposes.
(c) Copyright 2001. The Christian Science Monitor