Privatization of Social Security: Why some favor it, and some don't

The Outlook

February 25, 1996|By Bill Atkinson

Social Security is on the table. Various proposals call for allowing workers to divert at least a portion of their payroll taxes into IRA-like accounts that they could invest and then draw down at retirement. What are the arguments for and against such a change? Are people ready to assume that degree of risk? Would most people be better off? Who benefits?

Karen Ferguson

Director of the Pension Rights Center and co-author of "Pensions in Crisis"

Privatization doesn't make a heck of a lot of sense. We've got a system in place that does what needs to be done in providing a basic floor of income security.

It has this redistributive effect of giving more to the lowest income levels who don't have anything else. The only problem with our Social Security system is it doesn't provide enough. A typical worker who works a lifetime in this country only gets 40 percent, or about two-fifths, of what he or she was earning before retirement.

Yes, the system today is facing serious problems, but those problems can be addressed within the current structure. The privatization concept has a great superficial appeal.

The whole idea of leaving people to make their own investment decisions is terribly frightening to most people and even to sophisticated people.

There are people who love to play the stock market, but most people have more important things to do.

William G. Shipman

Principal with State Street Global Advisors and co-chairman of the Cato Institute project on Social Security privatization

Does it have to be revamped? The answer is yes.

What is critical is how many workers there are to retirees. In 1950 there were 16 workers per retiree. Today, there are roughly three, in 2025 there will be roughly two. A worker born in 1970 retiring at the normal retirement age, which is age 67, will receive from Social Security $1,900 a month. Had the individual had the opportunity to invest the same dollar amount the stock market would have returned to the individual $11,700 a month. Over and above all of that, the system itself has an unfunded liability of $2.7 trillion.

Its investment returns are suboptimal, and the glacier of demographics cannot be stopped.

The Chilean system was the earliest one to be started in the Western Hemisphere when it ran into this issue and privatized in 1981.

What has happened has been rather extraordinary. The amount people have to pay in as a percent of payroll is less than what the Social Security tax was. The amount that they are receiving is more.

Now, just roughly 15 years later, these assets have been built up to be 50 percent of GDP [gross domestic product]. It is roughly $25 billion. If you put that on U.S. equivalent terms, that would be a level of assets of $3 trillion to $3.5 trillion.

Teresa Ghilarducci

Associate professor of economics, University of Notre Dame

The privatization issue represents a hidden agenda by two groups. One group is the Wall Street money management firms who are really salivating for the new business. The other is a group of very smart, well-placed academics who have always thought the Social Security system should be privatized.

They are affiliated with the Cato Institute.

The Cato Institute and others are saying we have this organization model that has sprung from Chile. In 1981, the military regime of Pinochet wanted to reduce government and sell off the state-owned enterprises. They needed a stock market so they abandoned the social security system and required employees to put 10 percent of their paycheck in a fund, and the employers contributed nothing.

On top of that, employees have to contribute 3 percent of the paycheck for administrative fees. These funds work like mutual funds and you [investors] can invest in that. You get lots of profit. It's good for Wall Street and the highest-paid males.

It [privatization] adds new risk to the system. Now your stupidity can hurt you. I have a Ph.D. in economics and I don't want to invest my own portfolio.

James S. Riepe

Managing director, T. Rowe Price Associates Inc.

There is absolutely no question that the system is going to implode and that a radical solution has to be developed.

Your oldest baby boomers just hit age 50 this year and you've now got almost 20 years of those baby boomers going through. They are the ones who will blow the system apart.

Given that, we ought to start now. The question is, what do you do? Some part of the answer must be to allow individuals to begin to privatize a portion of their Social Security contribution. The other thing the government will be able to consider is having restrictions of the investment options.

I think you can put restrictions on this money so you can't take it out to buy a house, you can't take it out to buy a car, you can't take it out for medical bills.

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