Privatizing Social Security??

As I was driving home from work today, I listened to WORD talk radio out of Spartanburg/Greenville, SC. The regular host, Bob McClain was on vacation so Tony Dale did the show in Bob’s place. Since Tony has a financial show on Saturdays, most of today’s show was on financial matters as is wont to happen when Tony subs for Bob.

Today, the subject was the privatization of Social Security. It’s always interesting to hear the “call-ins”, what they have to say and how the host responds to the callers. For instance, one caller “told” me something I didn’t know before; That Jim DeMint is for the privatization of Social Security. I can imagine why I didn’t already know that as I’m sure that DeMint has kept his views on privatization of Social Security pretty close to his chest, it being the “third rail” of American politics and all.

Another caller got in a heated discussion with Tony Dale about how he wants the government to give him back all the money he’s “invested with Soc. Sec., all the while, tony’s trying to tell the caller that there’s no money there. Tony went into how today, there’s only three people putting in for every person who’s taking out and how that is unsustainable. Tony even gave the caller a very good and understandable analogy about how it works. Lets see if I can remember it. He also explained to the caller about how even though he’d been putting money in all these years, it didn’t go into a separate account with his name on it, but went to pay current beneficiaries. I still don’t think the caller got the gist of what Tony was trying to tell him.

” Lets say you live in a neighborhood with 200 hundred other households. In  one of the households, lives an older couple who are struggling and can’t make ends meet. Everyone in the neighborhood gets together and decides to help the older couple. So they each give a certain amount of money to the old folks. As time goes on, people move on and no one else moves into the neighborhood. As the population of the neighborhood shrinks, each household’s outlay to the older couple grows and grows as the population gets smaller. Pretty soon, there’s only two other households left to take care of the older folks. Them old folks come to their neighbors and tell them they need more money. Well, those people have given all they have to give without going belly up themselves. It’s the same thing with Social Security; pretty soon, we’re going to run out of money to throw at the problem as the working force shrinks and the number of beneficiaries grows.”

Another caller made an interesting point about how working Black families are really hurt by Social Security. And it doesn’t have anything to do with racism. It has to do with statistics. Statistically, Black men die at younger age than other races, so they really don’t benefit from the money they’ve put in all those years. If Social Security was privatized and they invested their money or even just put it into a savings account, they would get a return on their investment and also would be able to pass it along to their heirs, whereas the money they’ve put into Soc. Sec. is gone…poof!…when they die. As an aside, Social Security isn’t the only government program that hurts Black folks, but that’s for another day.

I hadn’t really thought much about it before except to ruminate on how it didn’t matter anyway because Soc. Sec. would be broke before I could start collecting. So I did a little poking around and found some “for and against” articles. Here’s one by Peter Fererra of the Cato Institute;

”

In this study, Peter Ferrara offers a proposal based on the following key elements:

• Current workers could be free to choose either the private option or Social Security. For those who choose the private plan, workers and employers will each pay 5 percent of wages, instead of the current Social Security payroll tax of 6.2 percent for each, into private investment accounts, resulting in an eventual payroll tax cut of 20 percent. Besides supporting retirement benefits, the accounts would finance private life and disability insurance, thus replacing Social Security survivors and disability benefits.
• Workers who opt out of the current Social Security system would receive recognition bonds from the federal government that would pay them a proportion of future Social Security benefits equal to the proportion of lifetime taxes they had already paid.
• Benefits promised to current retirees would be paid in full, with no reduction of any kind.”

And more a little deeper in his report;

” Politics is the art of the possible, the saying goes. In regard to Social Security, what was once impossible is now probably inevitable.

What was unthinkable in mainstream politics just a few years ago—the privatization of Social Security—is now highly popular at the grass roots. Every day brings more establishment and institutional support for the idea as well. Moreover, this mushrooming support is coming from across the political spectrum.

Those who have not followed the issue in recent years should consider the following:

Public opinion is shifting. While Social Security was once the “third rail” of American politics, Americans are increasingly willing to consider reform of the system, including privatization. A 1994 Gallup Poll found that 54 percent of Americans thought that participation in the Social Security system should be made voluntary, which is actually a more radical change than privatization.^[1] Another Gallup Poll, this one in January 1995, found that by 47 to 32 percent, Americans thought that Social Security was not “a good program for today’s younger workers.” The same poll found that by 53 to 23 percent, those interviewed believed that “most people could make more money by investing their retirement funds in the private sector than they could with Social Security.”^[2]

Likewise, a poll by GrassRoots Research in November of 1995 found that 38 percent of today’s workers would withdraw from Social Security if offered the option, even if they received nothing in return for the taxes they have already paid. Among workers ages 30 to 39, 48 percent would choose to leave the current system.^[3] Last year, Public Opinion Strategies conducted a nationwide poll for the Cato Institute which found the public favoring the idea by 68 to 11 percent.^{[4] “}

The monetary benefits to privatizing Soc.Sec. are astounding if they are to be believed;

” In this country, economic and political leaders are beginning to advocate privatization. In a May 1996 address to the American Economics Association, Professor Martin Feldstein of Harvard estimated that the present value of the future benefits to the United States of privatizing Social Security would be an astounding $10–$20 trillion.^[7] Privatization of Social Security has also been endorsed by Nobel Prize-winning economists Gary Becker, James Buchanan, and Milton Friedman, as well as the current president of the American Economics Association, Arnold Harberger. ”

Some more numbers thrown about by people “in the know” ;

” Up until now, the biggest objection to privatizing Social Security has been the fiscal impact of the transition to a privatized system. During that transition, benefits to today’s retirees must continue to be paid. Yet workers will be paying their funds into private retirement investments. This will leave a transitional shortfall in the financing for outstanding benefit obligations.

But the projections of the fiscal impact of the reform plan offered in this study show that

• The transition can be financed without new taxes and without cutting benefits for today‘s recipients. Indeed, the transition can be financed while also providing for a 20 percent payroll tax cut after 10 years.
• Apart from the tax cut, the net transition deficit would be eliminated in only 14 years.
• Before that point, the transition deficits can be financed in part by issuing new government bonds, or selling existing Social Security trust fund bonds, totaling no more than $500 billion (in 1996 dollars). However, privatization would produce sufficient net surpluses by the 22nd year after it begins to completely pay off and retire all the bonds previously sold to finance the transition.
• The remaining net transition deficits in the early years can be offset by reductions in government spending totaling approximately $60 billion per year, or approximately 4 percent of total federal spending.
• Perhaps most remarkably, once the bonds issued to finance the transition are paid off, privatization would actually start producing large surpluses that would reduce the federal budget deficit. “

The article goes on at length about the benefits of privatizing Social Security. Hit the link above to read the whole article.

Now for the against argument.

Here’s an article…Twelve reasons Why Privatizing Social Security is a Bad Idea by Greg Anrig and Bernard Wasow. You can hit the links below to read the whole thing. They’ve even got pictures and everything.

• Introduction
• Reason #1: Today’s insurance to protect workers and their families against death and disability would be threatened.
• “Rate of return” calculations neglect the value of Social Security’s insurance protections. Of the 45 million Americans who collect payments from the Social Security program, over one-third (almost 17 million) are not retired workers. Among those currently receiving Social Security payments are 5 million spouses and children of retired and disabled workers, 7 million spouses and dependent children of deceased workers, and 5 million disabled workers. Proposals to privatize Social Security involve shifting some of the money financing the current insurance program into investment accounts assigned to each worker. But the payroll taxes carved out to pay for personal accounts are resources that are need to support today’s payments to recipients of Social Security’s survivors and disability insurance as well as retirement benefits. Simple arithmetic suggests that every dollar shifted from Social Security programs to personal accounts is a dollar less to provide guaranteed income to the 37 percent of beneficiaries who are not retired workers…..
• Reason #2: Creating private accounts would make Social Security’s financing problem worse, not better.
• Social Security is funded by a flat tax of 12.4 percent of each worker’s wage income, up to $90,000 in 2005, split evenly between employers and employees. About four out of five of those tax dollars go immediately to current beneficiaries, and the remaining dollar is used to purchase U.S. Treasury securities held in the system’s trust funds. Beginning in 2018, well after the huge generation of baby boomers born between 1946 and 1964 begins to retire, a portion of general income tax revenues will be needed to pay interest and eventually principal on those bonds to fully finance benefits. A “crisis” is not forecast to arise until the program becomes entirely “pay as you go” again (as it was throughout its history before 1983) in either 2042 according to the trustees’ forecast or 2052 according to the Congressional Budget Office. (By way of perspective, in 2052 the oldest surviving baby boomers will be 106 years old and the youngest will be 88.)……..
• Reason #3: Creating private accounts could dampen economic growth, which would further weaken Social Security’s future finances.
• Privatizing Social Security will escalate federal deficits and debt significantly while increasing the likelihood that national savings will decline-all of which could reduce long-term economic growth and the size of the economic pie available to pay for the retirement of the baby boom generation. The 2004 Economic Report of the President included an analysis of the fiscal impact over time of the most commonly discussed privatization proposal by the president’s commission. It found that the federal budget deficit would be more than 1 percent of gross domestic product (GDP) higher every year for roughly two decades, with the highest increase being 1.6 percent of GDP in 2022. The national debt levels would be increased by an amount equal to 23.6 percent of GDP in 2036. That means that, thirty-two years from now, the debt burden for every man, woman, and child would be $32,000 higher because of privatization. [Corrected figure]…….
• Reason #4: Privatization has been a disappointment elsewhere.
• Reason #5: The odds are against individuals investing successfully.
• Reason #6: What you get will depend on whether you retire when the market is up or down.
• Reason #7: Wall Street would reap windfalls from your taxes.
• Reason #8: Private accounts would require a new government bureaucracy.
• Reason #9: Young people would be worse off.
• Reason # 10: Women stand to lose the most.
• Reason #11: African Americans and Latin Americans also would become more vulnerable under privatization.
• Reason #12: Retirees will not be protected against inflation.

Not being a financial guru or even a guru in training, I can’t refute or prove the claims of either author in their respective articles. All I know is something’s gotta give…and I’m tired of giving with little or no hope of any return. So my gut feeling is to go with Mr. Ferrera’s assertions about the big potential upside to privatizing Social Security.