Social Security Privatization: A Review of the Risks
Nearly four years ago, President George W. Bush tried to make the privatization of Social Security a cornerstone of his second term. His approach was roundly criticized by economists and Social Security experts, unpopular with the American people, and failed to even earn a vote in Congress.
Now, despite a period of deep financial uncertainty, some conservatives are still promoting the idea of carving out private accounts from the Social Security system.
Research has shown that private accounts are risky, expensive, a financial boon to Wall Street, and would undermine the long-term solvency of Social Security.
The Benefits of Social Security
Social Security provides key support for American seniors in their retirement. Over 65 percent of seniors use Social Security payments as the majority of their retirement income. A report by the Center on Budget and Policy Priorities estimated that Social Security benefits keep 13 million seniors out of poverty.
Social Security also provides benefits to disabled workers and their families, widows and widowers, and the children of deceased workers. Only 63 percent of people who received Social Security benefits in August 2008 were retired workers; the others were spouses, children, widows and widowers, and the disabled and their families.
Is Social Security “broken”?
Despite conservative rhetoric to the contrary, the system is not in “crisis.” The Social Security Trustees’ 2008 annual report concluded that Social Security will continue to pay full benefits for more than the next three decades—through 2041—after which it will pay 78 percent of the promised benefits.
The long-term Social Security shortfall is projected to be less than 0.56 percent of national GDP, less than the revenue lost by extending Bush’s tax cuts for the richest 1 percent of Americans.
Why Private Accounts Aren’t a Solution
“A standard ‘lifetime’ personal account, as envisioned by Bush and conservatives, would actually lose money one-third of the time” When Bush and conservatives proposed private accounts in 2005, researchers found that it put the Social Security system in danger and pushed workers to take unnecessary risks with their retirement security. Here is a summary of their conclusions:
Private accounts are risky
Bush and conservatives tout the potential for higher returns as a reason to shift Social Security payments into the stock market. But this potential for increased returns comes with a high risk.
- A standard “lifetime” personal account, as envisioned by Bush and conservatives, would actually lose money one-third of the time, according to Robert Shiller of Yale University.
- Depending on a worker’s birth date and retirement date, the eventual benefit from a partially privatized account would vary widely, from “100 percent to less than 20 percent relative to pre-retirement earnings,” according to Christian Weller of the Center for American Progress.
- Projections of rosy growth used to illustrate high returns from personal accounts stand in stark contrast to the projections of slower growth that indicate there may be an eventual shortfall in Social Security, according to Dean Baker of the Economic Policy Institute.
Private accounts are expensive
Private accounts drain money from the Social Security system and do not help shore up its long term solvency. In fact, making up the shortfall created by the added risk from private accounts could cost the taxpayer trillions and require cuts in benefits.
- Bush’s plan to add private accounts would have created $17.7 trillion in additional debt by 2050, according to James Horney and Richard Kogan of the Center on Budget and Policy Priorities.
- Private accounts significantly increase the costs of saving for retirement through management fees for private accounts, insurance premiums for equivalent risk protection offered by Social Security, and the huge transition costs from one system to the other, according to Christian Weller and Jeffrey Wenger.
- In order to pay for his private accounts, Bush proposed benefit cuts that would have affected 70 percent of taxpayers and left a shortfall that could have led to future cuts, according to Christian Weller.
Private accounts provide a boon for Wall Street
Private accounts need Wall Street financial managers to run them, and would siphon off worker’s savings to give a windfall in fees to big financial firms.
- Financial managers skim around 1 percent annually off the top of every private account, meaning that “account balances would be reduced by 21 percent over an entire working life for large plans with average fees of 0.8 percent of assets and by 30 percent under small plans with 1.0 percent of assets in annual fees,” according to the Congressional Budget Office.
- Individual accounts would lead to a net present value of $940 billion in fees shifted to financial services companies—more than 25 percent of the existing deficit in Social Security—according to Austan Goolsbee of the University of Chicago.
Private accounts gut Social Security’s insurance function
Private accounts would significantly undermine the insurance function of Social Security benefits, which provides a safety net for spouses, widows and widowers, and disabled workers and their families.
- Half of all Social Security beneficiaries, disproportionately women, children, and African Americans, receive some sort of insurance benefit (for survivors or disability), according to Radha Chaurushiya and Christian Weller.
- Bush’s plan that included private accounts, would have required “draconian” cuts to benefits for the families of deceased workers and disabled people and their families, and those cuts would come as soon as 2010, according to Peter Diamond and Peter Orszag of the Center for Budget and Policy Priorities.
Conclusion
Conservatives tout private Social Security accounts as a way to offer better returns for workers and shore up the solvency of Social Security. Research has shown that they are risky, expensive, a financial boon to Wall Street, and would erode Social Security’s ability to function as social insurance for disabled workers, their families, and the families of deceased workers.
For more, read the full report.
