Social Security: How to Privatize?

At presidential town meeting yesterday, focus is on using the stock market as a way to ensure retirement system's solvency.

By , Staff writer of The Christian Science Monitor

Momentum is building to privatize at least some of the nation's Social Security system - a move with potentially far-reaching implications for young and old alike.

For a growing number of experts, investing portions of the nation's retirement fund in the stock market would be one of the best ways to ensure solvency of the system in the 21st century.

In fact, many now argue the question is no longer whether to privatize, but how. While the issue remains hotly controversial - and may never fly in Congress - the current debate among supporters centers on two possibilities:

Recommended: Could you pass a US citizenship test?

* Invest a piece of the giant pie known as the Social Security Trust Fund in the stock market.

* Give individuals their own slice to invest, by diverting a portion of their Social Security taxes to personal retirement accounts.

In both cases, a chunk of Social Security would be left to cover disability and other insurance, as well as to perhaps act as a safety net if the individual account model is adopted.

"We're cutting to the chase," says Martha Phillips, executive director of the Concord Coalition, a fiscal watchdog group. The organization, together with the American Association of Retired Persons, sponsored the third presidential town meeting on Social Security yesterday in Albuquerque, N.M. Privatization was scheduled to be the sole focus.

The debate, kicked off by President Clinton, was to concentrate on the Trust Fund-individual account alternatives. But even with this narrower scope, there is still plenty of teeth gnashing over how much to invest and who should do the investing.

Those who support investing part of the Trust Fund in the market argue that it shares risk, costs far less than an individual account to administer, and is less of a worry for Americans who still aren't sure of the difference between a stock and a bond.

Individual accounts

Supporters of individual accounts tout it as a pay-as-you-go system that would no longer be susceptible to surges or contractions in the population. Perhaps more important, the money would belong to the people - no politician could be tempted to spend a surfeit of funds or give it out as a tax break.

Moreover, they argue, the returns could be substantial. Since 1926, Treasury issues (where the Trust Fund is currently invested) have yielded an annual average return of about 5 percent, compared with 11 percent for stocks.

Although Social Security now runs a surplus, in 2032 retired Americans will only be able to get 75 percent of the benefits promised under current law. That's because of the baby boomers - too many of them hitting retirement age at once and not enough people in subsequent generations to support them.

Entitlement experts "are in complete agreement on the economics of the issue. Where we part company is the politics of the issues," says Peter Diamond, a Massachusetts Institute of Technology professor who was part of yesterday's panel discussion.

Mr. Diamond advocates investing a piece of the big Trust Fund in the market. First, he says, it's less risky than setting up individual accounts. If the market nosedives, the hurt is spread among millions of Americans. If you retire the day after a market crash, you haven't lost your life savings.

Second, it would cost far less for the government to administer one or a few huge investment funds rather than a) educating Americans about how to invest their own accounts and b) the cost of managing millions of individual portfolios.

Diamond makes another point: Individual accounts are bad for women, who typically earn less than men and who outlive them. Although discrepancies in incomes already result in smaller Social Security checks for women, at least some protections are built into the current system: special provisions for widows and divorcees, for instance, and protection from inflation.

In theory, these protections could be built into individual accounts, but "would they be?" Diamond asks.

But Diamond seems to be swimming against a tide of lawmakers on Capitol Hill, where some Democrats and many Republicans favor some sort of individual account, even if it's just a fraction of a person's overall Social Security support. They believe individual accounts would produce higher returns than government-invested money.

Lawmakers are responding to arguments that, for many Americans, this would be their first chance at building up real equity - equity that does not disappear the day you pass on but which could be handed down to heirs.

Many big businesses also prefer the individual approach: They argue that having the government as the largest investor in the market gives one shareholder far too much influence. "At some point," says Diamond, "it all comes down to a vote on how Americans feel."

Public tuned out

That is hard to determine because, according to polls, while Americans are discussing the issue more, they still haven't fully grasped the implications of the proposed policy changes. And, according to a poll released last Friday by Americans Discuss Social Security, a nonpartisan group, 64 percent of Americans believe policy makers don't understand how they feel.

That would explain why thousands of senior citizens were expected to descend on Washington yesterday to protest the privatization of Social Security. It might also explain the results of a new poll by 2030 Center, a youth advocacy group. Young people, according to the poll, not only want Social Security to be there for them, they favor investing in the Trust Fund, as opposed to the risk of individual accounts.

Share this story:

We want to hear, did we miss an angle we should have covered? Should we come back to this topic? Or just give us a rating for this story. We want to hear from you.

Loading...

Loading...

Loading...