Hidden costs of privatization

The big sales pitch of those urging privatization of Social Security is that Americans would get a better return on their payroll deductions if the money was invested in stocks and bonds.

"This claim is false," three university economists argue in a new paper.

The problem is that privatizers ignore the costs of switching systems, says one of them, Stephen Zeldes of Columbia University in New York.

Today's pay-as-you-go system is obliged to pay pensions to those already retired and to those who will retire in the decades ahead.

This "unfunded liability" amounts to $5 trillion to $8 trillion, depending on how it is calculated, says William Shipman, a principal at State Street Bank, Boston, active in the privatization push.

Under Mr. Shipman's plan, future pensions would be funded gradually by a buildup in private market investments, using 5.3 percent of payrolls. But that money would then not be available to pay pensions under the old system.

The deficit, notes Mr. Zeldes, would have to be financed by new debt, new taxes, or by general revenues. Taxpayers would likely end up paying interest on trillions of dollars of debt, making the return worse than the present system.

of 5 stories this month > Get unlimited stories
You've read 5 of 5 free stories

Only $1 for your first month.

Get unlimited Monitor journalism.