Privatization of Social Security – What’s the beef?
By John D. Turner
14 Feb 2005

Ok, call me dense --- I don’t get it. The sight of people marching around carrying placards reading “Don’t Privatize Social Security” and “Social Security works for working families” make no sense to me. What is it that they are afraid of?

You would think the Government planned to take all their hard-earned money that they have saved up in their Social Security accounts and spend it. But wait – there is no money in their Social Security “accounts”; the Government already has spent it. Social Security as it now exists, is a pay-as-you-go program built on a promise to deal you into the game when you reach the appropriate age, and the Government spends every cent it takes in – including the so-called “surplus” created by the last Social Security tax increase that was supposed to keep the system solvent.

True, the system isn’t bankrupt – today, although it will be some years in the future, necessitating a cut in benefits, an increase in taxes, or both. The longer we wait to address the problem, the more expensive the final solution will be. Democrats know this; they have said so in the past. But since the system isn’t bankrupt today, and they are not in power, able steer the direction of change and take credit for fixing the problem, they would prefer to stick their heads in the sand and pretend the problem doesn’t exist. Besides, if the problem is fixed, they lose the ability to scare senior citizens into voting Democrat by telling them that the Republicans plan to cut their Social Security.

“Don’t Privatize Social Security”. Why not? Is it because the Government is doing such a great job with your money? It’s funny; when it comes to 401k’s, health insurance, and the like, these same people are champions of making it so that your benefits are portable from one job to another. Yet when it comes to Social Security, having control of your own money, instead of a Government promissory note, is a bad thing.

If Social Security is privatized, with the money going into the stock market, why then, some money grubbing stock broker will make a profit in the process. Horrors! I would much rather leave the money in the Government’s hands, so that the Government can spend it instead! Besides, the likely proposal to pass the Bush administration’s muster will contain a plan similar to that found in TSP, the Federal Government’s version of the 401k.

Under this plan, there would be only a handful of funds that one could choose from, predominately indexed funds, a bond fund, and a money market fund. The default setup would be a “Lifespan fund”, which automatically rebalances the mix of stocks to bonds based on the age of the worker; more in “riskier” stock investments when young, and more in “safer” bond investments when older and nearing retirement. This would enable workers to take advantage of the potential growth of stocks when young, and cushion them from the adverse effects of a market downturn just when they are getting ready to retire.

Far from jumping off into an experimental unknown, privatization of government pension systems have been accomplished already, most notably in South America. Chile, for example, privatized their social security system in 1981. While problems with their approach have been noted, we can also learn from their experience and ensure that some of the pitfalls they experienced are avoided. For example, management fees on their accounts are reported to be in the range of 16-20%. If these figures are accurate, they represent a huge drain on any potential profits that might accrue in these accounts. Any fund managers here in the US who attempted to charge such high fees would soon find themselves out of business, as no one would pay them. The current management fee on TSP, for example, is around 0.3%, which is well below what the funds typically yield, and much less than their average yield over time.

Of course, one should also consider that inflation in many South American countries, Chile included, is much higher than here in the United States, and may contribute to numbers such as this, which seem exorbitantly high by our standards when taken on their face value.

Then again, what you read is colored by the point of view of the author (this article included). People tend to see what they want to see, and often spin the facts to support their argument. Again, using Chile as a case in point, not everyone sees Chilean privatization in the same light. Some see gloom and doom, some see things more positively.

“Social Security Works For Working Families”? What exactly does that mean? Particularly since the Social Security tax is a payroll tax, meaning you have to work to pay the tax and to qualify for the benefits. By definition, if you draw Social Security, you “work” (or at least you have in the past, for at least 40 quarters). Even stockbrokers “work”…and pay into Social Security. And will draw Social Security benefits when they retire – assuming the system is still viable when that happens. It’s a catchy slogan, but it’s semantically null; it means nothing with regards to solving Social Security’s problems.

Social Security works – today. That doesn’t have anything to do with what is going to happen in the future, which is what privatization is intended to head off. And if nothing is done, it is going to happen, just as sure as taxes (which are sure to rise).

What do the Democrats have to offer in place of privatization, other than pretending everything is just fine, despite having said otherwise prior to the current administration. More of the same, apparently. Then, when the system becomes insolvent around 2018 or so, they will be faced with the same quandary; raise taxes, cut benefits, or both. The raising taxes part shouldn’t cause them any particular heartburn; they seem to think that’s the solution to any shortage of funds. As for the cutting of benefits, no problem there either. They can always blame Republicans for having “mismanaged” things.

The liberals seem to have a basic mistrust of anything that isn’t directly controlled by the Government. If it involves private enterprise, it is automatically suspect. Someone might benefit “unfairly” (i.e., make a profit). Letting the individual make decisions, rather than leaving things to the wiser heads populating the corridors of Congress is anathema as well. You might not make the “proper” choices, as defined by those who know better than you what you need or should do with “their” money.

If you controlled your own account, it would be your money, not theirs. (Despite the fact that it never was theirs in the first place; control is nine tenths of the law.)

The current privatization proposal, like the President’s first-term “largest tax cut in history” is laughably weak any event. Four percent is too small, making the benefit marginal in the amount of time I have left before retirement. Couple that with a cap of $1000, rising at a paltry $100 per year and it makes no sense for me to dump the current plan in favor of the private fund. For a worker just starting out, it may be a good deal, but for someone who is already 48 years old, and making considerably more than $40,000 a year, it makes no sense at all. Assuming of course that the current plan will still be in place, with no benefit cuts, when I reach retirement age; an assumption that may not be warranted.

If I could have applied the entire amount that currently goes into Social Security to a private account from day one, including the half paid by my employer, I would have no worries about retirement when the day comes. Even invested in money market funds, I would have more than I will receive from the current Social Security system.

Of course, that will never happen. Because Social Security isn’t just about a “retirement” check when you reach age 62, 65, 67, or 70, depending on when you elect to begin drawing. It also includes disability programs, such as SSI, whereby you can draw money if you are deemed unable to work for whatever reason. These payments will still have to come out of the Social Security budget, unless they are transitioned to the general fund. This is unlikely, as they represent a very large unfunded liability.

The biggest problem with “tinkering” with Social Security, from the Democrats point of view, is that it would make changes to a program that, by definition, is sacrosanct. While it is fashionable to describe Social Security as the “third rail” of politics; one that you dare not touch under penalty of instant political suicide, another explanation describes the Democrats position more exactly. Social Security is the cornerstone of FDR’s New Deal. And the New Deal is the centerpiece of the Democrat’s contribution to modern Socialist society.

Only Democrats are allowed to “tinker’ with what “Saint” Roosevelt established. Only they have the proper vision, and the best interests of the people at heart. Extending Social Security, as Johnson did with the Great Society programs is fine, and in keeping with Roosevelt’s vision. Privatizing the program, taking it out of the hands of Government and putting it back in the hands of the people, is regressive. Nothing good can come of it.

Things have changed quite a bit since Roosevelt’s day. People live longer now, and draw Social Security longer than they did in the past. We have slaughtered 40 million of our future citizens in the name of “choice”; citizens that are not around to pay Social Security taxes to keep the system solvent. We have tacked numerous other programs onto the Social Security system, all in the name of fairness and compassion, and these have added to the burden. The system does not work as it once did. It is time for a new vision, a “new deal”.

It seems sort of odd, don’t you think, that it is the “Conservatives” that are proposing progressive change based on changing times, and the “Liberals” who want to conserve the old way of doing things by preserving the status quo?