The False Promise of Social Security Privatization
11 Pages Posted: 17 May 2001
Date Written: May 2001
Social Security is the single largest transfer program in the world. In 1999, Social Security paid $334.4 billion in benefits to retired workers and their families and collected $396.4 billion in taxes. More than 151 million persons worked in jobs covered by Social Security and paid Social Security taxes, while more than 37.9 million received benefits. In 1998 more than 90 percent of elderly households received social security payments, and such payments provided more than half of total income for 64 percent of individuals aged 65 and older living alone.
According to all observers, Social Security faces a long-term financial problem. Although the Social Security Trust Fund currently boasts a substantial balance and collects far more in taxes than it pays out in benefits, this situation will change over the next several decades as the Baby Boom generation hits retirement age. By 2015 Social Security will be paying more in benefits than it collects in taxes, and by 2039 the Trust Fund will be exhausted, given current benefit formulas and tax rates.
Partially in response to this problem, but also to address other concerns about Social Security, a growing chorus of politicians, policy analysts, and economists advocates the full or partial privatization of Social Security. Among politicians, President George W. Bush has made partial privatization the center-piece of his solution to the Social Security crisis. Among economists, Harvard University's Martin Feldstein is the most visible advocate of this approach, but many others have endorsed some form of privatization. Similarly, policy analysts at conservative and libertarian think tanks also support privatization.
Privatization means creating private, individual accounts in which Social Security participants would put some or all of the monies they would otherwise pay in Social Security taxes. One common argument in support of this approach is that, since stocks have historically paid a higher return than either the government bonds held in the Social Security Trust Fund or Social Security contributions themselves, allowing individuals to purchase stocks rather than paying taxes will improve Social Security's rate of return and thereby alleviate the impending crisis.
In this paper we explain that privatization per se does nothing to alleviate Social Security's impending fiscal imbalance or improve Social Security's rate of return. Privatization might have desirable consequences - as well as negative ones - but for reasons independent of the alleged crisis. Our goal is not to advocate for or against privatization; we simply attempt to clarify what privatization can and cannot accomplish in hopes of focusing debate on the real issues.
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