Two excellent articles regarding the privatization of Social Security
appear in this week's BusinessWeek (January 24, 2005, available at
www.BusinessWeek.com). The first article, "Social Security: are
private accounts a good idea?" (pages 64-70) does a good job of
explaining how Social Security actually works and the implications of
any degree of privatization.
Your question assumes that there are "Social Security earnings on
these payments." In reality, there is no such possibility. "The
official fiction is that workers' payroll deductions plus employers'
contributions go into a trust fund that builds up savings for
retirement. In reality, the trust fund is filled with government
IOUs, while workers' and employers' taxes go right out the door to pay
the Social Security checks of today's retirees. Currently, with most
boomers still in the workforce, there is a surplus in the SSA accounts
(although Congress spends every penny of it each year on other federal
programs)," (page 68).
Therefore, the issue is less one of whether or not an individual's
contributions to the program exceed or are less than lifetime benefits
received, but whether or not benefits owed in a single year by Social
Security as a whole exceed or are less than that year's payroll tax
collections. Based on fairly pessimistic assumptions, it is believed
that at some point between 2042 and 2052, the gap between payroll tax
collections and benefits owed will be sizable, with only two-thirds of
benefits promised being available.
Any degree of privatization greatly accelerates the opening of the gap
between current payroll tax collections and benefits payable. None of
the proposed privatization plans attempt to do anything to close the
gap. Instead, they solve the problem by reducing benefits. By
adjusting how the benefits increase for inflation, quite draconian
benefit cuts result. "Higher returns from private accounts would not
offset these lower benefits for well over 75 years, even in the
best-case scenario," (page 69). Even after 75 years of private
account investing of 4% of payroll, the average worker winds up with
20% less of a benefit than the current system promises.
Furthermore, the Social Security system becomes even weaker. Because
even a partial privatization results in a shortfall affecting current
retirees' benefit checks, the government would have to borrow $1
trillion to $2 trillion to keep the system afloat for several decades
until the benefit reductions associated with private accounts came
into full effect.
Therefore, the answer to your question is that because Social Security
is run on a pay-as-you-go basis without any upfront funding, allowing
anyone to pull out any money for a private account, let alone opting
out completely, would hurt Social Security finances. In fact, under a
plan of just contributing 4% of payroll, the private accounts would
yield almost 58% of the total benefit received 75 years from now.
However, even though it is estimated that $8 trillion would accumulate
in private accounts after 75 years, there would still be $300 billion
less to pay Social Security benefits, so retirees would receive less
than they are currently promised, and less than half of that payment
would be from the traditional Social Security system even though it
received two-thirds of the payroll tax.
Another important point is that "...affluent people are more likely to
live longer than Social Security intended. So they are getting more
out of the system than they pay into it," (page 70). However, these
are the same people that are providing a majority of the current
collections, so the system will still be hurt if they are allowed to
opt out.
Some doubt exists that the shortfall will really occur. The
assumptions resulting in the prediction of a $3.7 trillion shortfall
over the next 75 years are based on significantly slower growth in
Gross Domestic Product and the labor force. However, the dramatic
increase in immigration and rapid growth occurring since the mid 1990s
have reduced both the predicted shortfall and postponed the date when
it occurs. Even partial privatization will guarantee that a shortfall
occurs, and that it does so immediately. The government would have to
borrow at least 160 billion per year to cover the shortfall during the
first years of the new system.
The question is whether or not benefits will be reduced or taxes will
be raised to compensate for the wider, now guaranteed gap. It is
clear that it will take over 75 years for allowing people to invest
their payroll taxes in stocks to payoff sufficiently to even match
currently promised benefits, so either benefits would be reduced for
the next two to three generations, they will have to be taxed more, or
the government will have to stop spending the Social Security surplus
(which at this point may still be inadequate given that it is expected
to cease by 2018).
Finally, as is discussed in the second article "Windfall on Wall
Street?," (pages 76-77) private accounts will create the opportunity
for Wall Street to collect management fees. Insurance companies would
also like to compel retirees to take their benefits as annuities,
resulting in further fees. The current Social Security system, while
it offers workers minimal returns on their investment, is not burdened
by investment management fees. Such fees will further reduce the
benefits retirees can receive, particularly if more expensive actively
managed funds are permitted.
What is clear from the analysis in BusinessWeek is that privatization
alone will not solve the problem, if it really exists, any time soon.
Some economists recommend waiting for at least another decade to "fix"
Social Security to see if the assumptions that are resulting in the
forecasted crisis are overly conservative. Any amount of
privatization essentially guarantees a short-term crisis requiring
sizable government borrowing, and privatization alone will not avert a
crisis for at least 75 years unless it is combined with benefit cuts
and/or tax increases.
Sincerely,
Wonko |
Clarification of Answer by
wonko-ga
on
18 Jan 2005 17:52 PST
I am not sure that your initial question is really relevant because of
the way the system is funded. Its solvency at any point in time has
nothing to do with whether people are taking more or less than what
they put in to the system out over their lifetimes because the trust
funds and earnings on the trust funds are accounting fictions.
Congress spends the actual cash. Because the ability for the system
to pay benefits each year is determined by that year's collections,
and that year's collections have nothing to do with what the
beneficiaries paid in because there is no trust fund in reality,
anyone who is allowed to opt out hurts the system while they are
contributing and helps the system when they are collecting if they are
collecting less benefits than they would have otherwise received had
they not been allowed to opt out.
Because so many different categories can take out more from Social
Security than they contribute regardless of income level, such as
widows, multiple spouses if a person has divorced multiple times with
each marriage exceeding 10 years, disabled people, and dependent
children, I suspect it is unlikely that a particular income level can
be pinpointed as supplying a net contribution. In general, because of
lower life expectancies, smokers and lower income people would be more
likely to supply a net contribution. However, the system's payouts
are also progressive in nature so that lower income people receive a
larger amount relative to their contribution than do higher income
people.
One problem associated with voluntary participation in private
accounts is that higher income workers are more likely to participate.
This is described in "Lesson from Abroad: Make Them Mandatory" by
Peter Coy, BusinessWeek (January 24, 2005) page 77. In particular,
because private accounts weaken the traditional system, low income
workers find themselves "... relying on a system that is in financial
straits and politically vulnerable as the rich bailout." British
workers also find themselves confused about whether or not they should
establish personal accounts. The author makes the argument that
private accounts, if enacted, should be mandatory so that everyone is
in the same boat. If certain income groups are more likely to abandon
the system, and it ultimately collapses such that only those with
private accounts receive anything close to the promised benefits, then
your concerns about the impact of certain income groups on the
solvency of Social Security is applicable.
In summation, because there is no trust fund storing the Social
Security surplus, the system's solvency has no relationship to whether
a person can take out more than they contribute or less than they
contribute. What matters is the income of the workers each year and
their payroll tax contributions relative to the benefits due that
year. It is precisely because the government has not maintained a
trust fund with the Social Security surplus that the problem exists.
I have just received my weekly Time magazine, and it purports on its
cover to provide additional information on Social Security. I will
post anything I discover that enhances our discussion. You should be
able to read it online this week without a subscription at
www.Time.com.
Sincerely,
Wonko
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