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PRIVATIZATION WOULD BE
DANGEROUS FOR SENIORS

By David J. Roberts
Associate Professor of Accountancy
DePaul University

In this election year, many candidates are pitching partial privatization of Social Security.  They typically argue that so-called personal accounts (to use the more politically marketable terminology) are needed to save Social Security.  President Bush is a proponent of such personal accounts.  But partial privatization would not likely "save" Social Security, and would probably cause serious harm to seniors and long-time participants in the current system. 

Most of the new money going into Social Security goes right back out to pay current benefits.  The excess presently goes into the trust funds, and could instead conceivably be invested in private accounts.  But a big part of the problem is that this excess will be going away.  All the new money and more will ultimately be needed just to pay promised benefits under the current system.  Without privatization, government will already face a major cash-flow problem when it is called upon to redeem the government bonds held by the trust funds.

Diverting new money into private accounts might benefit new younger participants upon their distant retirement, but this would probably come by shortchanging those who have paid into the current system for their entire working lives.  Simply put, if the problem is that there will not be enough money to pay already-promised benefits at a particular date using all of the tax revenue, how would it help to use even less? 

Some privatizers acknowledge that there would be a huge transition cost, saying that the transition could be funded from government's general revenues.  But the total shortfall will ultimatelybe trillions of dollars.  If privatizers have some secret plan to come up with this money, they should tell us.  Thus far, they have typically avoided addressing this critical question. 

With President Bush's tax cuts, the government budget is showing record dollar amounts of red ink.  And the national debt, representing the accumulation of over 200 years of government borrowing, is up an almost unbelievable 28% under Bush.  So where will the money come from to fund the transition?

Of course those with private accounts could generate higher returns on those accounts than Social Security generates.  Most of the Social Security tax revenues are not invested; they simply go right back out to pay old-age, survivor and disability benefits.  There is relatively little investment upon which to have any return.  So how would privatizers pay all the promised benefits and come up with the new money to invest?

Note that when privatizers promise a higher "return", they frequently ignore the tremendous value of the present survivor and disability coverage that has helped so many families through tough times.  If privatizers plan to end these important aspects of the social safety net, they should say so.

Making matters worse, privatizers usually promise an expensive new benefit--the ability to leave the account balance to heirs upon death.  If government can't afford the present set of benefits, how can it afford this new inheritance benefit?

Current participants should be particularly concerned that good returns on small private accounts would lead younger workers to demand full privatization.  Greater privatization would further drain the new tax revenues needed to pay benefits promised under the present system.

President Bush and most Republicans favor some degree of privatization.  Some believe that it is not the role of government to provide a safety net; people should be on their own to sink or swim.

And it is easy to see how the financial services industry--major Bush campaign contributors--would benefit from getting its hands on thoseprivate accounts.  But it is hard to imagine how privatization would help older workers and seniors, and it is easy to see the potential for tremendous harm.