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Privatizing Social Security is a Terrible Idea

Proposals to privatize Social Security start with younger savers who will enjoy the benefits associated with long term investment returns. If individuals are given a chance to invest in the stock market when they are young, they will have accumulated enough wealth in a private account that they won’t have to worry about putting bread on the table. Nonetheless, the stock market involves risk and risk is the other thing Social Security recipients cannot afford.

Social Security provided retirement benefits for 44 million workers and their families in 1997 and provided most of the retirement income for two-thirds of retirees. But projections say that by twenty years or so from now on, social security will begin to face a shortage of funds, unless changes in the system are made. Social security is a pay-as-you-go system. The payroll taxes of today’s workers go to today’s retirees. And when today’s workers retire, they will be supported by the next generation’s payments into Social Security. Thus, if your Social Security payments are diverted into your own private accounts, your money won’t be there for the current generation’s retirement.

Bush’s supporters allege that privatization in other countries has been great success. Well, they are wrong. Chile’s privatization plan requires huge subsidies and has saved the government nothing. The British privatization experiment has been disastrous and is now seeking to remedy the defects of privatization. It is indeed clear that privatization would increase administrative costs; eliminate income transfer, disability and survivor’s coverage and spousal benefits.

Further, when a worker becomes disabled or dies social security provides for their families. This insurance system takes tax money and redistributes it from those who are fortunate enough to work until retirement to those who suffer accidents or illnesses. A private system, in which a person is responsible for their own retirement savings would reduce or eliminate this insurance.

It may, however, be theoretically possible for the federal government to bail out the retirement payment for the current generation by drawing on general tax revenues but that won’t happen because there won’t be any spare revenues.

Quite apart from breaking the intergenerational compact and being unaffordable, privatizing Social Security would expose retirees to huge risks. Hence, the whole point of Social Security is to spread the risk so you don’t end up with no retirement savings if you have made bad investments or if you have been caught in the down-draft of a bad economy.

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