Why Privatizing Social Security Is a Terrible Idea

When President Franklin D. Roosevelt signed the Social Security Act into law in 1935, he launched the most ambitious program of social reform in the country’s history. It was destined also to become the most popular and the most successful, and to operate with unparalleled efficiency. There was strong opposition, but it became muted after the unprecedented FDR landslide in 1936. The opposition did not die, though; it went underground. It emerged a generation later, when encouraged by the political success of Ronald Reagan and his anti-government message.[1] It now has reached its peak. Never before has a sitting president -- not even Reagan, who became more cautious when he took office -- called openly for privatization (even if, on the advice of his consultants, Bush now avoids the use of the word).

The consensus that Social Security must be “reformed” is an outgrowth of Reagan’s successful conservative movement. Adopting the term “reform,” presupposes that something is wrong. Powerful interest groups foster that assumption, and compliant media have long carried their message. Moreover, even supporters of Social Security have fallen into the trap of its enemies. It is insufficient, they frequently say (Nicholas Kristof is an example), merely to be “nay-sayers.” It is necessary to come up with “reform” proposals to counter the president’s, rather than to “do nothing.” Certainly, that makes no sense -- unless it is clear that indeed something must be done. Despite the propaganda, that is not at all clear. (Note: in the interest of full disclosure, I must say that I am in no way a mere “nay sayer.” As I have outlined elsewhere I have my own proposal to improve Social Security. It would eliminate any question about the viability of the Trust Funds, it would not involve privatization, it would stimulate the economy, and it would provide a tax cut for nearly every worker. It is not, however, needed to prevent Social Security from going “bankrupt,” a word that in any case is inappropriate when applied to a government program.)

The annual reports of Social Security’s Trustees currently include three projections. Alternatives II and III project ultimate depletion of the Trust Funds. Alternative I, however, projects a continuing balance -- no deficit and no future trouble, yet the “Intermediate Projection,” calling for the money to run out is the only one publicized.

In 1983, following revisions to the system based upon recommendations of the Greenspan Commission, the intermediate projections were actuarially balanced. Since 1988, however, they have reflected a depletion year. That date, though, has always been at least thirty-two years away, and in recent years it has progressively receded. The Trustees themselves warn that their projections are not predictions. The fact that the projected depletion year changes constantly demonstrates that cannot be precise. The projections, then, are merely educated guesses.

Oddly, hardly anyone ever asks the obvious question: “what happened to the surpluses projected earlier?” The reports explicitly spell out the answer: nothing happened to them. The Trustees merely adopted more pessimistic assumptions for their calculations! Yet only a few observers ask, “Why revise a superbly successful system because of shaky projections?” Instead, conventional wisdom has come to accept the necessity of “reforms.”[2] People have been frightened by misleading, and largely irrelevant, statistics regarding the number of workers supporting the system. More important by far are productivity and the rate of economic growth. If these continue at historic levels, the Trust Funds will be fully adequate.

As would be expected under the circumstances, there are varied reform proposals. [3] All involve either increases to the Trust Funds, or reductions in benefits. Bush’s proposed “reform,” the administration now admits, would not enhance the ability of the Trust Funds to continue to pay benefits indefinitely, and would involve great benefit reductions for those currently under age 55. [4] Bush’s plan calls for permitting participants to divert a portion of the FICA taxes into private accounts.

Those favoring Bush’s idea allege that privatization in other countries has been a great success. They are wrong. If they believe what they say, they are misinformed. The British experiment is disastrous, as the Wall Street Journal has conceded [5] The UK now looks to a much better system as the British seek to remedy the defects of privatization. That system they are examining is America’s Social Security.

Bush has praised Pinochet’s plan in Chile as being “a great example for other countries.” He has said that the U.S. could “take some lessons from Chile, particularly when it comes to how to run our pension plans.” [6] The Pinochet plan, though, requires huge subsidies, and has saved the government nothing. [7] Moreover, its administrative costs are huge, and it has greatly reduced benefits.

There is a clear warning here. The most highly privileged segment of Pinochet’s military dictatorship -- the one treated most favorably and the one that imposed privatization on the rest of society -- was, of course, the army. The army protected itself, however, and remained in the public system. As a result, it has fared far better in terms of benefits than has the rest of the population.

Many conservatives praise Peter Ferrara’s ambitious privatization plan, but it is based on great optimism, and enormous borrowing. [8] It is clear that diverting money from Trust Funds would worsen any imbalance -- and it is not clear that there even is an imbalance. Nor is it clear why it is that anyone -- for reasons other than ideology or greed -- under the circumstances would advocate privatization (by whatever name).

There is no doubt that privatization would increase administrative costs. There also is no doubt that it would eliminate income transfer, survivors’ and disability coverage, inflation protection, and spousal benefits. These would be terrible losses. Beyond these, privatization would introduce risk, disparity of return, and the possibility of outliving benefits. None of these exist under Social Security.

There can be little doubt, at least among those who view the issue objectively, that it is purely iIdeology (or misinformation), not economics, that generates the enthusiasm for privatization.

NOTES

[1] See Skidmore, Medicare and the American Rhetoric of Reconciliation (Tuscaloosa, Ala: University of Alabama Press, 1970).

[2] See Eric Kingson and James Shulz, eds., Social Security in the 21 st Century (New York: Oxford University Press, 1977).

[3] See Robert M. Ball and Thomas Bethell, Straight Talk About Social Security (New York: Century Foundation Press, 1988), chapter 2; Arthur Benavie, Social Security Under the Gun (New York: Palgrave Macmillan, 2003).

[4]See David E. Rosenbaum and Robin Toner, “Bush Says a Gradual Overhaul of Social Security is Essential,” New York Times (February 3, 2005), p. 1ff.

[5] Benavie, pp. 59-64; Skidmore, Social Security and Its Enemies: The Case for America’s Most Efficient Insurance Program (Boulder, CO: Westview Press, 1999), p. 4.

[6] Larry Rohter, “Chile’s Retirees Find Shortfall in Private Plan,” New York Times (January 27, 2005), p. 1.

[7] Benavie. 2003, 65-68.

[8] Robert Greenstein and Richard Kogan, “The Ferrara Social Security Plan.” Center on Budget and Policy Priorities (December 22, 2003); http://www.centeronbudger.org/12-10-03socsec.htm .

REFERENCES

Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Disability Insurance Trust Funds. Various years. Washington: U.S. Government Printing Office

Baker, Dean and Mark Weisbrot. 1999. Social Security: The Phony Crisis. Chicago: University of Chicago Press.

Eisner, Robert. 1998. Social Security: More, not Less. New York: Century Foundation Press.

Peterson, Wallace C. 1999. The Social Security Primer. Armonk, NY: M. E. Sharpe.

Related Lnks

• U. S. Social Security Administration, Official Website, www.socialsecurity.gov. It contains extensive historical and actuarial information.
• Social Security: HNN Articles and Excerpts