Should Social Security Go Private? Putting Retirement Funds at Risk Ignores the Idea of Social Insurance

By Jerry L. Mashaw and Theodore R. Marmor | St Louis Post-Dispatch (MO), December 18, 1996 | Go to article overview

Should Social Security Go Private? Putting Retirement Funds at Risk Ignores the Idea of Social Insurance


Jerry L. Mashaw and Theodore R. Marmor, St Louis Post-Dispatch (MO)


Alarms are sounding from all directions, urging Americans to be anxious about their Social Security pensions. We, too, believe that Social Security pension reform belongs on the national agenda. But is there a financial crisis that demands a major revamping of the system - "privatizing" it - as so many eager analysts and politicians insist? The answer, in a word, is no.

In fact, relatively minor adjustments in finance are all it would take to resolve Social Security's latest technical problems. The case for "privatizing" substantial portions of the pension package has much more to do with the ideological preferences and economic interests of the privatizers than with the solvency of Social Security.

The situation is this: The Social Security system today is accruing substantial surpluses, and total income will continue to exceed outlays until about the year 2020. After that, however, Social Security's accumulated reserves will have to be retired to pay for benefits, which will begin to exceed what taxes at current levels will bring in. By 2070, if no adjustments are made in the interim, Social Security will be in deficit - short by an estimated 2.2 percent of payroll. Peter Peterson, the country's reigning guru of economic gloom, is thus technically correct. The current system is "unsustainable." But Peterson's assertion that the country cannot finance anything much like the current system is nonsense. According to Robert M. Ball, former commissioner of Social Security, the total 75-year deficit can be eliminated, and then some, by taking only a few steps that are neither radical nor difficult. Ball and five other members of the Social Security Advisory Council have proposed, first, to make moderate adjustments in how Social Security pensions are calculated and taxed and, second, to get a better return on the money that will be accumulating in the Social Security trust fund until the year 2020. The trust funds are now invested entirely in Treasury securities. Ball group proposes to invest 40 percent in higher-yielding equity securities instead. Five other member of the 13-person Advisory Council have proposed a more radical option: a substantial privatization of the Social Security system. Under their plan, every worker would get a personal security account (PSA) financed by diverting nearly 40 percent of the payroll taxes that currently finance Social Security. The money in this account could be invested as the worker chose. Upon retirement, workers would receive whatever had accumulated in their PSAs plus a small "base pension" financed the old way. This base pension - set at $410 a month - would be lower than today's average benefit under SSI (the means-tested Supplemental Security Income program) and far lower than the poverty threshhold. But the PSA proposal diverts so much money from the Social Security trust fund that the privatizers, to provide even this minimal guaranteed benefit, had to propose additional payroll taxes (a raise of 1.52 percentage points in the FICA tax), benefit reductions and public borrowing. According to the Office of the Actuary at the Social Security Administration, both of these advisory council proposals satisfy the statutory requirement that the scheme be in long-term (75-year) actuarial balance. But, if so, why go beyond the Ball solution? The real debate plainly is about something else. These plans are similar in one other way. Both tie Social Security's fortunes more closely to the performance of the private capital markets. Historically, that has been a good investment strategy. Nevertheless it is a strategy with risks. The stock market is subject to quite precipitous "corrections." And though, over long periods of time, the average investor can expect to do better by investing in the market, some people will do substantially worse. In effect, the Ball approach puts the market risk on government and on all of us collectively. …

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