Borrowing to Save: A Critique of Recent Proposals to Partially Privatize Social Security

Social Security remains one of the United States's most important and successful public programs. Social Security, also referred to here as Old Age and Survivors Insurance and Disability Insurance (OASIDI), is important in part because it is so large. At the end of 2004, 48 million people were receiving benefits: 33 million retired workers and their dependents, 7 million survivors of deceased workers, and 8 million disabled workers and their dependents (Board of Trustees, 2005). Social Security is also important because it contains provisions for people of all ages, including survivors and disability benefits, and because benefit levels are adjusted for inflation and are progressive. That is, the program pays retired workers with a history of low wages a higher percentage of their preretirement earnings in monthly benefits than it does other workers. Even so, workers who earned higher wages receive a higher level of monthly benefits. Social Security has been successful. Since 1959, poverty rates for older Americans have dropped by more than two-thirds, from 35 percent to about 10 percent in 2003. Although poverty rates for elderly people in 1959 were higher than for children or for working-age adults (ages 18 to 64), in 2003 they were lower than for either group. Nearly two-thirds of U.S. senior citizens get at least half of their income from Social Security, and one in five has no income other than Social Security (Board of Trustees, 2005). Among the most pessimistic forecasts of OASIDI's future is an estimate that OASI revenue from payroll taxes will be less than projected benefits by 2018, and by 2044, the trust fund (which is currently $1.4 trillion) will be exhausted (Board of Trustees, 2005). If disability insurance is also considered, the trust fund will be depleted in 2042. These projections assume no increase in the payroll tax, that the U.S. economy will grow at a slower rate over the next 75 years (that is, inflation-adjusted gross domestic product gains will drop to 2 percent per year versus the 3 percent average that has held for the past 75 years), and the size of the labor force will increase 0.35 percent each year, versus a historic average of 1.4 percent. However, more optimistic forecasts, based on historic growth rates, predict program solvency (Bernstein, 2005). Proposed strategies to address OASIDI's uncertain future include increasing payroll taxes, decreasing benefits, and using revenues from the general fund. Perhaps attracting the most media attention is another option that would allow individuals to invest some of their payroll taxes in private savings accounts (PSAs, or partial privatization). If, or when, long-term program solvency can be accomplished is unclear. However, in the short term, the establishment of PSAs will either accelerate a projected deficit (2020) or at least reduce the surplus. With PSAs, a decrease in program revenue would occur because those already retired or nearing retirement would keep their Social Security checks, whereas some of younger workers' contributions would be diverted into individual accounts. Proponents of PSAs argue that the costs of these accounts are transitory because the diverted funds would eventually be offset by lower traditional Social Security benefits. However, lowering of benefits as a result of PSAs is not expected for several decades, requiring the government to borrow money, raise taxes, or reduce benefits to continue providing traditional Social Security for U.S. senior citizens in the interim. Borrowing might be the most politically feasible strategy, and consequently, in effect, the government will have to borrow now to promote savings for the future. Although partial privatization seems unlikely in the near term, future proposals for substantive changes to Social Security are probable. Consequently, it is essential that social workers be familiar with the details, strengths, and weaknesses of recent proposals to partially privatize a highly successful public retirement system. …