Privatising the social security system would harm economic growth

Creating private accounts could have an impact on economic growth, which in turn would hit social security's future finances. Economic growth could be hit as privatizing Social Security will increase federal deficits and as a result debt significantly, while increasing the likelihood that national savings will decline which will happen as baby boomers retire anyway and draw down their savings. An analysis by the Centre on Budget and Policy Priorities shows that the proposed privatization by Obama would add $1 trillion in new federal debt in its first decade of implementation, and a further $3.5 trillion in the following decade.[1] Because households change their saving and spending levels in response to economic conditions privatization is actually more likely to reduce than increase national savings. This is because households that consider the new accounts to constitute meaningful increases in their retirement wealth might well reduce their other saving. Diamond and Orszag argue, 'If anything, our impression is that diverting a portion of the current Social Security surplus into individual accounts could reduce national saving.' That, in turn, would further weaken economic growth and our capacity to pay for the retirement of the baby boomers."[2] The deficit, and as a result national debt, would increase because trillions of dollars which had previously been paying for current retirees would be taken out of the system to be invested privately. Those who are already retired will however still need to draw a pension so the government would need to borrow the money to be able to pay for these pensions.[3] Contrary to side proposition’s assertions, privatization also would not increase capital available for investment. Proponents of privatization claim that the flow of dollars into private accounts and then into the equity markets will stimulate the economy. However, as the social security system underwent the transition into private ownership, each dollar invested in a financial instrument via the proprietary freedoms afforded to account holders, would result in the government borrowing a dollar to cover pay outs to those currently drawing from the social security system. Thus, the supposed benefit of a privatised social security system is entirely eliminated by increased government borrowing, as the net impact on the capital available for investment is zero.[4] While four fifths of tax dollars for social security is spent immediately the final fifth purchases Treasury securities through trust funds. Privatization would hasten depletion of these funds. President Bush proposed diverting up to 4 percentage points of payroll tax to create the private accounts but with payroll currently 12.4% this would still be significantly more than the one fifth that is currently left over so depleting reserves. Funds now being set aside to build up the Trust Funds to provide for retiring baby boomers would be being used instead to pay for the privatization accounts. The Trust Funds would be exhausted much sooner than the thirty-eight to forty-eight years projected if nothing is done. In such a short time frame, the investments in the personal accounts will not be nearly large enough to provide an adequate cushion.[5] [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] 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 [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