The answer is sensitive to small changes in assumptions about such key variables as inflation, labor force participation, and immigration. The overarching variable is the growth of economic activity. Growth will raise the amount needed for pension benefits, tied as they are to lifetime earnings, but it also will enable the nation to pay a relatively large Social Security bill and still provide a satisfactory rise in living standards for all. If benefit formulas and tax rates are kept unchanged, some 30 years from now the reserves will be exhausted and the system will be able to pay only about 75 percent of benefits out of current receipts, with progressively smaller percentages thereafter. In effect, the intergenerational compact that I pay for my father and my son pays for me would be broken.
Privatization is a response to that eventuality.
It is no accident that privatization is in vogue now, after almost 20 years of a spectacular run on Wall Street. Valuation measures have gone off the charts, and risk premiums seem to have fallen to zero, if not below the line. Many proponents of privatization would also reduce benefits, but the essence of the argument is the large prospective return on equity investment. It is not investment in equities per se that distinguishes privatization plans. The federal government could do such investing, just as state governments do for pension funds.