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Privatizing Social Security:
Voodoo 2

by Steve Gorin
Canterbury, New Hampshire

George W. Bush clearly plans to make Social Security a central issue in the presidential campaign. Although this is a gamble, he hopes to capitalize on the widespread perception that Social Security is in crisis. Governor Bush advocates partial privatization, which would allow employees to invest part (probably 2 percent) of their payroll deduction in individual retirement accounts (IRAs). This would allow workers to control their own money and presumably benefit from high returns in the stock market. Unfortunately, privatization could bring Social Security crashing to the ground.

To begin with, Social Security is not in crisis. Our current prosperity has extended the solvency of the program well into the next century. In 1999, the Social Security Trust Fund had assets of about $896 billion. According to the Social Security Trustees' best (or intermediate estimate), these assets will not be exhausted until 2037. Even then, Social Security will take in enough in payroll taxes to meet 70 percent of its obligations. So while there is a gap, there will still be money to pay benefits.

Will privatization close this gap? Privatization will work only if real stock returns average 7 percent during the next 75 years. However, the Trustees' projections assume unusually slow rates of economic growth (about 1.5 percent per year), which most experts believe are incompatible with stock returns of 7 percent. If the economy exceeds the Trustees' projections, Social Security will have enough money to meet its obligations indefinitely.

Privatization also entails risks. If, as Governor Bush proposes, workers divert 2 percent of their payroll contributions to IRAs, Social Security would have to reduce benefits by as much as 30 percent. Advocates of privatization assume this reduction would be offset by investment returns; however, this is not guaranteed. Indeed, the privatizers themselves acknowledge that private accounts will compensate for benefit reductions only on average. Yet, averages can be deceptive. Averaging my income with Bill Gates' would make me look like a billionaire. Unfortunately, this is not the case.

The real problem with our retirement system is not Social Security. Social Security is part of a three-legged retirement package, which also includes personal savings and employer pensions. This is where the difficulty lies. Since the early 1970s, wages have largely stagnated and personal savings lagged. At the same time, the percentage of the work force with employer pensions has declined, and employers' contributions to pensions have dropped dramatically.

Essentially, privatization promises something for nothing. Twenty years ago, many of Governor Bush's advisors also promised something for nothing. The Governor's father labeled that plan as 'voodoo economics.' He was right, and the country paid a huge price for experimenting with supply-side economics. These same people are now trying to sell us another bill of goods. We should recognize it for what it is and reject it.

Stephen Gorin is a Professor in the Social Science Department at Plymouth State College, Plymouth, New Hampshire.

Published in In Motion Magazine May 30, 2000.