While the Social Security benefit formula rewards higher earners with larger benefits, it also replaces a larger proportion of a low-wage earner's income once he or she retires. The progressivity in benefit payments is designed to help offset the regressive character of the payroll tax on which workers' contributions are based. Older women living alone would be especially affected, as four in ten rely on Social Security for at least ninety percent of their income. Privatization could destroy the progressive nature of the Social Security program. In a system of private accounts, lower-income workers would have less to invest than higher income earners, and less opportunity to accumulate sufficient returns for their retirement years.
Privatization involves huge transition costs.
The privatization of Social Security would involve huge transition costs in order to pay current beneficiaries and those nearing retirement age. Since a portion of the FICA tax would be diverted from Social Security to private investment accounts, they would no longer be available to finance current obligations. As a result, taxes would either have to be raised or benefits cut, or the government would incur massive debt. Proponents of privatization rarely raise the issue of the changeover costs. In addition to benefit cuts, the changeover could involve tax options including an increase in the FICA tax or a regressive national sales tax.