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by Ron Forthofer
Originally in the Denver Post June 14, 1998
In the current push for privatization of Social Security, Wall Street points to a "crisis" and claims we must speculate in stocks in order to save the system. To buttress this crisis claim, Wall Street points to the report of the Social Security Trustees, which projected by 2029 Social Security would deliver only 77% of promised benefits.
However, the latest estimate from the Trustees pushed the projected first year of shortfall back from 2029 to 2032. In addition, the Trustees pointed out that this estimate did not take into account recent changes in the Consumer Price Index. According to Dean Baker of the Economic Policy Institute, the year is pushed back to 2043 if those changes are considered. The change from 2029 to 2043 in just 17 months shows the futility of making long-term economic projections.
Furthermore, this shortfall projection is based on an assumption of growth in the U.S. economy lower than what we experienced during the Great Depression. If real growth is even slightly greater, there won't be any shortfall at all. However, if the projections for such slow growth are correct, it's unlikely that the stock market would be a good investment.
If there's no crisis, why the push for privatization? The answer is easy - follow the money. Wall Street profits if all of us in Social Security are forced to become its clients. Fees and administrative cost, now under one percent, would rise dramatically. The Twentieth Century Fund estimates that the privatization proposal favored by brokers would yield $240 billion in fees to Wall Street between now and 2010 regardless of how the market performed. Given the recent euphoria about the stock market, people forget they can lose their shirts in the market. For example, few recall that the Dow Jones Average was close to 1000 in 1966, dropped to 578 in 1973, and was still only about 1000 in 1984.
In addition, advocates of privatization usually ignore the huge transition costs of converting to a partially or totally privatized system. The 1994-1996 Advisory Council on Social Security's analysis of Personal Security Accounts (PSA), a partially privatized plan, estimated that the transition would require a tax increase equal to about 3 percent of taxable payrolls for roughly thirty-five years. A substantial cut in benefits would also accompany the transition tax increase, hardly an attractive deal.
The private pension program in Chile, long hailed as a model for us, has been dropped like a hot potato by privatization advocates. A recent report from the United Nations Development Program found that the Chilean program did not live up to its billing. The UNDP estimated that two-fifths of retirees will now need state help as, over the past three years, the Chilean stock market has mostly gone downhill, lowering returns to an average of 1.8%.
Advocates of privatization also ignore key aspects of Social Security; namely, its cost-of-living adjustments to protect against inflation and its insurance policies. According to a Twentieth Century Fund report, the estimated value of Social Security's disability policy is $203,000. In addition, Social Security's dependent and survivor policy for a twenty-seven-year-old, average-wage worker with two children has an estimated worth of $295,000. Social Security provides enrollees with more life insurance protection than the combined value of all private life insurance policies of all types in the United States.
Privatization will primarily benefit banks, brokers and other large corporations at the expense of the taxpayer. These groups already do quite well at the public trough, receiving approximately $200 billion per year in corporate welfare. They don't deserve any more!
If more money is really needed to fund Social Security, consider taxing all earned income. The income cap (currently $68,400) means people with high incomes pay far lower percentages of their wages to Social Security than those with low to moderate incomes. Eliminating the cap would provide over half the funds necessary to avoid the projected shortfall. If still more money is needed, why not tax both earned and unearned income? These alternatives are simple to implement without cutting benefits or raising the retirement age. Privatization will lead to social insecurity, not social security.