Problems With Taking Social Security Private

About a third of American investors say the Social Security system is in a "crisis."

It isn't.

Social Security tax revenues currently exceed outlays by $100 billion a year. The surplus, going into a trust fund, will continue to about 2013.

At that time, baby boomers will be retiring in large numbers. Payroll taxes will no longer cover outlays. So the trust fund will be drawn down to cover the deficit. It should last to 2029, fund trustees reckon.

Is the system then "bankrupt?" as some say.

Well, it still would be able to pay 70 to 75 percent of the benefits due retirees, their spouses, and the disabled after 2029. That is if no changes at all are made to the system.


"Give me a break," says Henry Aaron, an expert at the Brookings Institution in Washington. An event that may happen 30 years in the future if conservative assumptions prove right doesn't qualify as a crisis

"Problem? Yes," says the think-tank economist.

That's just how half of 2,600 investors polled by PaineWebber Inc. and the Gallup Organization see the issue.

Last month Sens. Patrick Moynihan of New York and Robert Kerrey of Nebraska, both Democrats, introduced a bill to ease the problem with some standard measures. It would increase wages subject to taxation from $68,400 this year to $97,500 by 2003. It would reduce annual cost-of-living adjustments by one percentage point to correct an upward "bias" in these adjustments. It would raise the retirement age to account for an increase in longevity, tax more of Social Security benefits, and make newly hired state and local government employees pay into the system.

More startling, they propose cutting payroll taxes by two percentage points, eliminating the current surplus in the pay-as-you-go financing system. Employees could then voluntarily put 2 percent of their take-home pay into personal savings accounts.

That proposal was widely seen as a way to avoid more radical privatization plans.

These are being pushed by Wall Street and the think tanks it helps finance.

The Washington-based Heritage Foundation, for instance, says a 30-year-old couple making $26,000 each reaps an inflation-adjusted 1.2 percent return rate from Social Security, when you compare the taxes they pay with what they eventually get back. They would get a 5 percent return on a privatized plan invested conservatively half in Treasury bonds and half in blue-chip stocks.

But Aaron points out that such calculations ignore Wall Street sales commissions and annual management fees. The fees alone could be 1 percent of the money invested. (Costs are 2 percent for Britain's privatized pensions.) Further, employers would have to bear the heavier administrative costs of deducting small amounts of money from each employee and sending it to whichever firm each employee specifies.

Also, many new retirees would want to buy annuities with the proceeds of their accounts to ensure a specific, though not indexed, income in their lifetime. These, on average, cost 20 percent of capital.

On top of this, employees take the risk of a bad stock market slashing the value of their account at retirement time.

Finally, a big administrative problem: Privatization plans ignore the fact that 80 percent of payroll deductions will be needed for decades to come to pay the pensions of current retirees and those near retirement, Aaron notes.

Privatization isn't as good as advertised.

You've read  of  free articles. Subscribe to continue.
QR Code to Problems With Taking Social Security Private
Read this article in
QR Code to Subscription page
Start your subscription today