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Social Security Ain't Broke

by Steve Gorin
Canterbury, New Hampshire

Senators Judd Gregg and John Breaux, along with President Bush's commission, believe our current Social Security system is unsustainable. The senators also seem to agree with the commission that partial privatization is needed to preserve Social Security for future generations.

Under partial privatization, workers would invest a third of their payroll deduction in individual retirement accounts and presumably take advantage of higher yields in the stock market.

With all due respect to the senators, there are several problems with partial privatization.

First, it seeks to solve a problem that may not exist. In their 2001 report, the Social Security trustees, whose members include Bush's secretaries of the treasury, health and human services, and labor, estimated that the trust fund had assets of slightly more than $1 trillion.

The trustees also presented three estimates of Social Security's future status. Their intermediate estimate, the one most often cited by the media, projects that the trust fund will run out of money in 2038. After that, Social Security will take in enough in payroll taxes to meet 73 percent of its obligations; by 2075, this will decline to 67 percent.

The problem is not saving Social Security but closing this gap.

It is important to note that the intermediate estimate assumes that over the next 75 years, economic growth will average only 1.5 percent per year. To put this in perspective, during the past 75 years, which include the Great Depression, economic growth averaged 3 percent annually. The intermediate estimate is thus extremely conservative. (See The American Prospect, Vol. 8, Issue 32, May 1-June 1, 1997: The Privateers' Free Lunch by Dean Baker)

If the economy does grow more quickly, the date the trust fund becomes insolvent will recede into the future. Economist Paul Krugman (New York Times, July 22) notes that if the economy were to grow at the rate assumed by Bush in his tax cut bill, the trust fund would still be solvent in 2075.

Second, even if the trustees' intermediate estimate proves correct, partial privatization is unlikely to close the gap.

For privatization to work, stocks must yield annual real returns of 7 percent over the next 75 years. Unfortunately, most experts believe returns of this magnitude are incompatible with economic growth of 1.5 percent. Privatization would also involve huge transitional and administrative costs, which would further reduce individuals' returns. In the end, privatization could reduce benefits by 30 to 40 percent.

Third, partial privatization would turn retirement into a crapshoot.

Under a system of private accounts, with variable rates of return, people would have a difficult time planning for the future. To ensure an adequate income, an individual would need to follow the market closely and time his or her retirement precisely. Even then, a substantial risk would be involved.

When these uncertainties are factored in, along with the costs of creating and managing a new system, partial privatization loses much of its allure. In contrast, Social Security, in its current form, provides a guaranteed income and disability and survivors' benefits. (An equivalent policy would run several hundred thousand dollars.)

For most people, partial privatization offers much risk and little payoff. If Social Security does face a shortfall in the future, we can find better ways of addressing the problem than partial privatization. We should move cautiously before making fundamental changes in a social insurance plan that affords many older adults, and their children, a decent standard of living.

(This piece was originally written in response to an article advocating privatization written by Senators Gregg and John Breaux in the Washington Post and reprinted by the Concord Monitor) .

About the writer: Stephen Gorin is executive director of the New Hampshire chapter of the National Association of Social Workers and a professor in the Social Science Department at Plymouth State College, Plymouth, New Hampshire.

Published in In Motion Magazine August 26, 2001.

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