Privatizing Social Security: Not Many Dividends for Women

Women would get a dandy deal from privatization of the Social Security system.

Or would they?

Two new graduates of the Kennedy School of Government, Harvard University, maintain they would.

"Virtually all women would be better off (many significantly) under a system of individually owned, privately invested accounts than under the current Social Security system," Ekaterina Shirley and Peter Spiegler write in a new study.

But whoa!

Women better look at the study's assumptions before buying this view.

More likely, privatization would increase the risk of retired women living in financial misery.

Notes a study by the Institute for Women's Policy Research: "It is essential to maintain the social insurance aspects of the current system in order to ensure that women, especially widows and other non-married women, are not thrust into poverty as a result of changes in Social Security policies."

There's no doubt women need to be concerned about their financial security in retirement. Women typically earn less than men, work 11 fewer years, and live longer than men. So women receive, on average, lower Social Security benefits than men.

Poverty rates among elderly women are twice as high as for elderly men: 13.6 percent vs. 6.2 percent. Women in general accumulate fewer financial assets than men and aren't so likely to have a company pension. As a result, on average nonmarried women over 65 rely on Social Security for 72 percent of their retirement income. Of that group, 40 percent get 90 percent of their retirement income from Social Security.

Aware of this situation, 39 Democratic women in the House of Representatives sent a letter in July to President Clinton and Vice President Al Gore asking them to address women's interests in the debate over Social Security.

The Shirley-Spiegler paper is distributed by the CATO Institute as part of its Wall Street-financed effort to promote privatization.

One problem with the paper's comparison of privatization and Social Security benefits is the annual rate of return - 6.2 percent - that Ms. Shirley and Mr. Spiegler assume in reckoning how much the money contributed to a private plan would grow by retirement time.

For one thing, it ignores administrative costs for private plans. Mutual-fund costs generally run about 1 percent a year of the portfolio. It might have to be higher for the small amounts many low-income women would be setting aside each year.

In Britain and Chile, administrative and sales costs have been even higher for privatized pension plans.

Nor does the 6.2 percent take account of the cost of switching to an annuity at retirement time. Social Security guarantees a retiree a pension indexed to inflation for her entire lifetime. Unless a woman with a private plan buys an annuity with her built-up funds to do the same at retirement, she stands in danger of running out of money if she lives a long time.

The cost of an annuity runs about 15 percent of the amount invested.

Without subtracting these two costs from the rate of return, the Shirley-Spiegler calculation is "pretty artificial," says Barry Bosworth, the Brookings Institution economist who calculated the 6.2 percent. The number is an estimate of the rate of return on physical capital for corporations, non-corporations, and housing for the entire nation for the years 1960 to '93. Presumably a portfolio of stocks, bonds, and other investments would grow in line with that, though stock returns can vary widely over long periods. Another problem with the calculation is that it ignores the burden of moving from the pay-as-you-go Social Security system to a fully funded private account system.

At present, those working pay Social Security pensions through payroll taxes. Under a private scheme, those working still provide the food, clothing, and other resources needed by those retired. But retirees get their money from their private investments, rather than from the government. The burden on those working remains unchanged. In a private system, workers would not only pay for present Social Security obligations, but also set aside their own private pension money.

Shirley and Spiegler acknowledge this problem as a "caveat" to their study. CATO avoids that vital issue in its press release on the study.

But working women should ask how any privatization plan deals with this "transition" problem.

One major danger for women from privatization plans is that they do little to provide "social insurance." Social Security, from an actuarial basis, gives high benefits to those who earned little in their lifetime. Since women on average earn less than men and live seven years longer, they would lose most from privatization.They get a little higher return on their contribution to Social Security than men get.

Higher-income women might do better under a private plan. Those with lower incomes could lose out.

* David R. Francis is the Monitor's senior economics correspondent.