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Social Security Renovate Optimistic Market Plan

The idea of Social Security privatization assumes that anyone can invest successfully and threatens to destroy the safety net for which social security was originally created. If the market was easy to understand we’d all become rich.

Successful investing will be an impossible goal for large number of Americans even as privatized Social Security is trotted out in the name of reform in the face of reality. According to Mr. Bush, under his plan, workers who go for private accounts will be better off than those who stick with traditional Social Security. The only problem is the forecasts raised some serious doubts.

As if successful investing isn’t challenging enough, even for the well informed, a potential plan to privatize Social Security would turn that responsibility over to novice investors. Privatizing Social Security is one of the bull’s new reasons for being bullish as they envision mountains of money moving into the stock market. The Bush privatization plan coming into view would work as follows. Workers now pay to Social Security 6.25 percent of their wages up to $87,900, matched equally by their employer. Workers would be allowed to divert four percentage points, up to a maximum of $1,000 a year, to private investments in stocks and bonds. The investment accounts would be limited to highly diversified mutual funds, or even index funds, and the transactions costs would be kept to a minimal 0.3 percent. So far so good. But to make sure there is enough incoming payroll tax to support promised benefits, Social Security benefits guaranteed under the present system would be cut slightly for each dollar the individual worker diverts to his or her private accounts. More important, future benefits would also be cut by indexing them to the rise in consumer prices rather than, as is now done, to rising wages, which tend, over time, to outpace inflation by a significant margin.

Most privatization plans involve a decided cut in average benefits. Still, advocates of privatization correctly point out, these cuts may be less over time than the cuts required to make the present system solvent.

Thus, there is no way of knowing exactly what the return on a personal account will be. So unless the real interest rates increase significantly or the government lowers the offset rate, economist will perceive personal accounts as a poor deal on a risk adjusted basis.

The privatization plan the Bush administration is leaning toward, in contrast, will divide people into winners and losers. It may make some workers better off in retirement, and may well reduce costs somewhat to government, if all goes well. But a significant number of American retirees will do poorly.

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