Privatising social security will harm retirees

As Greg Anrig and Bernard Wasow of the non-partisan think tank the Century Foundation argue: "Privatization advocates like to stress the appeal of 'individual choice' and 'personal control,' while assuming in their forecasts that everyone’s accounts will match the overall performance of the stock market. But… research by Princeton University economist Burton G. Malkiel found that even professional money managers over time significantly underperformed indexes of the entire market.”[1] Most people don’t have the knowledge to manage their own investments. A Securities and Exchange Commission report showed the extent of financial illiteracy for example half of adults don’t know what a stock market is, half don’t understand the purpose of diversifying investments and 45% believe it provides “a guarantee that [their] portfolio won’t suffer if the stock market falls”[2] Including all the management costs it is safe to say that growth from individual accounts will be lower than the market average. The private sector is therefore in no better a position to make investment decisions than the state. Privatised accounts would bring their own problems. They are vulnerable to market downturns. Despite crashes the long term return from shares has always been positive. But this does not help those that hit retirement age during a period when the stock market is down. With private pensions people would be relying on luck that they retire at the right time or happened to pick winning stocks.[3] The economist Paul Krugman has pointed out, privatizers make incredible assumptions about the likely performance of the market in order to be able to justify their claim that private accounts would outdo the current system. The price-earnings ratio would need to be around 70 to 1 by 2050. This is unrealistic and would be an immense bubble as a P/E ratio of 20 to 1 is considered more normal today.[4] If returns are low then there the added worry that privatized social security may not beat inflation. This would mean that retiree’s pensions become worth less and less. At the moment Social Security payouts are indexed to wages, which historically have exceeded inflation so providing protection.  Privatizing social security would have a big impact on those who want to remain in the system through falling tax revenues.  Implementing private accounts will take 4 per-cent of the 12.4 per-cent taken from each worker’s annual pay out of the collective fund. Thus, almost a 3rd of the revenue generated by social security taxes will be removed. Drastic benefit cuts or increased taxes will have to occur even sooner, which is a recipe for disaster.[5] It is for reasons such as these that privatization of similar social security systems has disappointed elsewhere, as Anrig and Wasow argue: "Advocates of privatization often cite other countries, such as Chile and the United Kingdom, where the governments pushed workers into personal investment accounts to reduce the long-term obligations of their Social Security systems, as models for the United States to emulate. But the sobering experiences in those countries actually provide strong arguments against privatization. A report last year from the World Bank, once an enthusiastic privatization proponent, expressed disappointment that in Chile, and in most other Latin American countries that followed in its footsteps, “more than half of all workers [are excluded] from even a semblance of a safety net during their old age.””[6] Therefore privatizing Social Security would actually harm retirees and undermine the entire system, and so Social Security should not be privatized. [1] Anrig, Greg and Wasow, Bernard. "Twelve reasons why privatizing social security is a bad idea". The Century Foundation. 14 February 2005. http://tcf.org/media-center/pdfs/pr46/12badideas.pdf [2] Office of Investor Education and Assistance Securities and Exchange Commission, ‘The Facts on Saving and Investing’, April 1999, http://www.sec.gov/pdf/report99.pdf pp.16-19 [3] Spitzer, Elliot. "Can we finally kill this terrible idea?" Slate. 4 February 2009. http://www.slate.com/articles/news_and_politics/the_best_policy/2009/02/privatize_social_security.html [4] Spitzer, Elliot. "Can we finally kill this terrible idea?" Slate. 4 February 2009. http://www.slate.com/articles/news_and_politics/the_best_policy/2009/02/privatize_social_security.html [5] Anrig, Greg and Wasow, Bernard. "Twelve reasons why privatizing social security is a bad idea". The Century Foundation. 14 February 2005. http://tcf.org/media-center/pdfs/pr46/12badideas.pdf [6] Anrig, Greg and Wasow, Bernard. "Twelve reasons why privatizing social security is a bad idea". The Century Foundation. 14 February 2005. http://tcf.org/media-center/pdfs/pr46/12badideas.pdf