The upward trend of stock prices has some market sophisticates asking, "Why can't I have my pension money invested in shares? Social Security is a lousy deal."
Beware! It's not so simple.
Yet privatization of Social Security is being heavily promoted and will be the topic of a White House town meeting on Social Security in Albuquerque, New Mexico, today. President Clinton is scheduled to be there.
With stock prices up 7 percent per year on average after inflation over the past 75 years, a private account invested in stocks may sound like a guaranteed way to retire in luxury.
Proponents of privatization aren't discouraging this view.
For example, Americans for Tax Reform, a Washington nonprofit group, offers a Web site where you can type in demographic facts to compare estimated monthly retirement income.
Take someone born in 1955, started work at age 21, and expects to earn between $30,000 and $35,000 a year on average.
At retirement, the site reckons, he or she would get a meagre $1,400 a month from Social Security, $8,207 from investment income, or a lavish $10,389 from an annuity.
Such calculations, say critics, are nonsense. Here's why:
1. Growth of the economy could slow down in coming decades as fewer young people enter the work force and the numerous baby boomers retire. That is why, the actuaries at the Social Security Administration say, the Social Security system will be unable to pay full benefits 34 years from now.
Over the long run, stock prices rise in relation to corporate profits. And profits grow in proportion to growth in the economy. So a slow-growing economy means that stock prices will rise more slowly than in the past.
2. The transition to a privatized system is costly, since no one advocates ignoring the pensions earned by those already retired or by those who have paid substantial amounts of payroll taxes and are still working.
So younger people will fork out the cost of the present mostly pay-as-you-go system and will need to set aside enough money in a privatized plan to provide themselves a good pension.
To deal with this problem, most privatization plans call for cuts in Social Security benefits. They assume the private portfolio will offset that loss.
A favorite suggestion is delaying normal retirement for Social Security to age 70. Focus groups put together by the nation's trade union federation, the AFL-CIO, find that extremely unpopular. "People are trying to figure out how to retire earlier, not later," says David Smith, director of public policy in Washington.
3. Investment in stocks is more risky. For long periods, the return can be less than the 75-year average.
The return on the Standard & Poor's 500 index was 3.6 percent a year from 1936 to 1951, 10 percent from 1952 to 1966, 3.4 percent from 1967 to 1981, and 12.3 percent from 1982 to 1996. Moreover, in real life, average means some get less than average returns, some more than average.
4. Administrative costs, far above those of the Social Security Administration, would eat into the return on privatized plans.
These, say Dean Baker, an economist at the Economic Policy Institute in Washington, run about 1 percent a year on mutual funds in the United States.
Setting up 148 million new accounts would be "a massive task," involving substantial start-up costs, notes Kelly Olsen, of the Employee Benefit Research Institute, Washington.