Keep Social Security stodgy

September 04, 1998|By Froma Harrop

GYRATING STOCK PRICES offer a not-very-gentle reminder of the hazards of privatizing the Social Security program. When you see a Wall Street Journal headline such as "Vulnerable retirees need to maintain their cool," you know that all is not no-lose in the land of equities-based retirement planning -- and that was before Monday's 513-point plunge in the Dow. But no-lose is exactly how the promoters of a privatized Social Security System have characterized a setup in which workers could put some or all of their Social Security payroll taxes into their own stock investment accounts.

That was an easier sell several months ago, when a bull market was snorting through its eighth year. Indeed, the bipartisan National Commission on Retirement Policy had recommended allowing workers to put 2 percent of their Social Security payroll taxes into private accounts -- a first step toward privatization. This period of market instability should serve as a wake-up call that stocks are no sure bet.

That said, privatization has some undeniably attractive features. recent decades, returns on stock investments have far outperformed the payout from Social Security. Privatizing would also relieve some of the structural problems of a pay-as-you-go program, where today's workers support today's retirees.

Every year, fewer workers are supporting more retirees because of longer lives and lower birthrates. That's not good, and it will get worse when the massive baby boomer generation starts retiring not long from now. If workers could put their Social Security taxes into their own accounts, they would not have to tap the paychecks of future workers.

What the privatization proposals ignore is human frailty. Until recently, several of my stock-investing friends were strutting around town, happily talking to themselves about their net worth. Let's see, I've got $180,000 here. Think I'll buy a Corvette and retire at age 47. People shouldn't, but they do fantasize that their paper profits are actually in the bank. Those in their late 50s or early 60s, who were making budgets for their retirement years, could see their hopes dashed in a sudden market reversal.

Privatizers will argue that such individuals would be held responsible for their own money management decisions. Well, tell that to the Marines. Actually, you might have to call in the Marines if a stock market crash were to ravage Social Security accounts. The bipartisan commission recommends, as a safeguard against foolhardy investment choices, allowing the private accounts to buy only into funds chosen by the government. If that were the case, and something terrible happened to one or more of the funds, guess whom the retirees would blame: Uncle Sam. And we can expect that elderly voters would not be overly shy about demanding a government bailout.

Many politicians and think tank intellectuals seem to ignore the reality that most Americans are rather unsophisticated about money. I'll never forget covering Rhode Island's banking crisis and receiving a call from a sweet but highly agitated woman who asked how her bank could possibly close. "It had branches!" she exclaimed.

Many other ordinary Americans may be dabbling in stocks, but they are still running up record levels of personal debt and looking to lotteries and slot machines to bail them out.

Social Security was created in 1935 to help keep the frail and elderly out of poverty. The life expectancy for a middle-aged American was then 54, while the age for collecting the first check was 65. Clearly, Social Security was designed to be a social safety net, not an investment vehicle to cushion a long retirement. It should remain stodgy but secure. You don't get much, but you know what you get.

Of course, responsible retirement planning would include a sizable stock portfolio. The prudent investor accepts some risk in the expectation that stocks will continue to offer good returns over the long term. But the government must stay out of such decisions. Once the federal government starts endorsing risky investments, voters burned by market downturns will make demands of the American taxpayer. In practice, privatization of Social Security would privatize only the stock market profits. We can be sure that the losses would become socialized.

Froma Harrop is a Providence Journal editorial writer and columnist.

Pub Date: 9/04/98

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