Seattle Press on Line - Stock Scams and Social Security

My Two Cents

Stock Scams and Social Security

By Dr. Dean Baker

May 31, 2000 -- With election season already under way, we are hearing a new round of Social Security privatization schemes. We already know the basic theme: if workers were allowed to invest their Social Security money in the stock market, everyone would be well off in retirement.

The promises may be pretty, but the privatizers' arithmetic doesn't add up. Voters must keep their focus on the real world, where there are no free lunches. If the privatizers get their way, the vast majority of workers will face a more insecure future.

There are three mistakes in the privatizers' math. First, they ignore the transition costs to their new system. Second, they ignore the administrative costs of operating privatized investment accounts. Third, the privatizers exaggerate the returns that can be expected from the stock market. When realistic numbers are used, studies show that most workers will be far better off with the existing Social Security system. Let's look at each of these three problems.

The transition cost issue is straightforward: money can't be in two places at the same time. Most of the money being paid into the Social Security system each year is paid out to people currently receiving benefits. If the Social Security money were instead placed in individual accounts, then the government wouldn't have the money to pay benefits to people who are already retired. Unless we tell the current generation of retirees that they're out of luck, we would have to raise the money from somewhere else to pay their benefits.

The source of money recommended by a presidential panel a few years ago was a 1.6 percent "transition tax" on wages. The privatizers usually ignore such transition taxes when they try to sell their program, but most workers could not ignore an additional 1.6 percent being pulled out of their paychecks. In short, while some politicians try to hide it, switching to a privatized system will cost the average worker more.

We don't need to guess on the administrative costs of operating a privatized system. Some countries, including Chile and England, have already gone this route. The news is not good. In Chile, the administrative expenses have been equal to approximately 15 percent of the money paid in each year. In England, the costs have been more than 20 percent. By comparison, the administrative expenses of our current system are less than 0.8 percent of annual Social Security tax revenue. A privatized system in the United States like the one in Chile would cost more than $60 billion a year to operate, compared to the current administrative costs for Social Security of less than $3 billion a year.

From the standpoint of workers, these administrative costs are the same thing as a 15-20 percent increase in payroll taxes, with the extra money going to Wall Street. Of course, the banks and brokerage houses that collect these fees in a privatized system would welcome these extra costs.

The third problem with the privatizers' picture is the rate of return they project for the stock market. Basically, they assume that stock market returns in the future will be as high as they were in the past. The problem with this assumption is that the Social Security trustees project that economic growth will be only half as fast in the future as in the past. There is no way that the stock market can continue to provide the same rates of return in an economy that is only growing at half its historic rate. If the economy does continue to grow at the level of the past, then Social Security will be able to pay full benefits indefinitely, and no reforms are necessary to "save" it. In short, the privatizers are using phony numbers when they project high stock returns and "crisis" for Social Security.

There is one last point to remember about the stock market: it is unpredictable, as the Nasdaq has shown so clearly in recent months. This means that a worker may see her benefits drop by 20 percent or more, if she happens to retire in a bad month. The stock market is a reasonable place for people to invest their savings, but it doesn't make sense as the basis for the core retirement income that Social Security provides.

For more than sixty years Social Security has done exactly what it is supposed to do. It provides a core retirement income and has lifted the vast majority of elderly out of poverty. It also provides survivors' benefits to the children of deceased workers and disability benefits for injured or ill workers. In short, Social Security protects all of us from the roulette wheel of accident, sickness, and old age that is part of life. And in doing so, it is extremely efficient and secure: no one has ever missed a check.

Furthermore, the latest projections show that the program can pay all scheduled benefits for the next thirty-seven years, with no changes whatsoever, even if the economy grows more slowly than it ever has in the past. Even after 2037, the program would pay benefits that are more than ten percent higher (adjusted for inflation) than what current retirees get, although this would be less than the full scheduled benefit.

In short, the Social Security program is a proven winner. The promised riches from privatization turn out to be false gold when exposed to the light of reality.

Dr. Dean Baker is a co-founder of The Center for Economic and Policy Research (CEPR), and the author of Social Security: The Phony Crisis (with Mark Weisbrot), University of Chicago Press, 1999; and Getting Prices Right: The Battle Over the Consumer Price Index, M.E. Sharpe Press, 1997.

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Kris Kay	Feb 05, 2005	Venice, CA	eldercare worker
This is very scary and it's even more scary there are no comments. People are so ill informed and ill advised about this issue. It's like taking candy from babies. It's exactly like Reagan's saving and loan deregulation debacle we are all still paying for.