The market is in another slump, and investors’ savings have once again shrunk. So now is the perfect time to make the case for privatizing Social Security.
This is not the conventional view on the subject. In the run-up to next month’s elections, Republican politicians have evaded all discussion of privatization — part of their shrewd campaign strategy of ceding all domestic issues to the Democrats.
It’s a foolish policy, because there has never been a better time to argue for privatization. The main argument against replacing Social Security with private investment accounts has been the fear of what might happen when the market goes down. Well, now we know. The worst fears raised by critics have been realized, with Wall Street at the bottom of the longest and possibly deepest bear market in 60 years.
The grim result: money invested in the stock market five years ago has performed just as poorly as money paid in Social Security taxes.
One-eighth of your salary goes to Social Security taxes — a much higher percentage than most of us put into our retirement funds. Yet Social Security offers most taxpayers a poor return. The average worker can expect Social Security to pay back the equivalent of a 1 to 2 percent annual “real” — that is, inflation-adjusted — return on his tax money. To put that in perspective, money put into safe, high-quality corporate bonds earns a real return of 3 to 4 percent, while stocks historically average a 7.5 percent real annual return.
But what about bear markets? Money poured into an average stock market portfolio this time in 1997, before the recent boom and bust, would be worth almost exactly what it was worth five years ago, as measured by the Dow Jones Industrial Average.
This actually understates the recent performance of stocks. If you own shares in General Electric, for example, the fact that you lost money in the last two years is only half the story. The other half is that you still own a portion of a productive enterprise. When the economy rebounds and the firm’s profits rise, you stand to make back your losses, and then some.
With Social Security, by contrast, you own nothing. Consider what happens if you die: your lifetime of Social Security taxes is not saved up in a personal fund that goes to your heirs. Survivors get only a percentage of your benefits — if you have young children. More important, all of your benefits are backed only by a promise, from today’s politicians, that they will tax future workers to pay for your retirement. But Congress can always reduce your benefits, fail to raise them to match inflation or cancel your benefits altogether. And they will be forced to do one of these things, because by 2015, Social Security will start bringing in less money than it pays out — a gaping financial hole that Congress has made no plans to fill.
The conclusion is clear: Social Security is a much worse way to provide for your retirement than private stock-market investments — even during the worst bear market in half a century.
So why is everyone afraid to suggest privatization? Why won’t Republicans take advantage of this golden opportunity?
The problem is that benefiting from stock market investment has some conditions. An investor has to make choices and acquire some elementary knowledge about how to manage his assets. He has to be careful, for example, to keep some of his savings in more stable securities, like bonds, rather than putting it all into the stock market. He has to make sure his investments are diversified — that he doesn’t risk all of his money on speculative technology stocks or on a single company (like the workers who lost their entire life savings when Enron collapsed). In short, a stock-market investor must take responsibility for his own future.
This is what Republicans are afraid to say. They promote privatization, not as an alternative to government handouts, but as a substitute for them, as if private investment accounts are just a different means by which society can assure everyone a guaranteed minimum income, regardless of his choices. So they can’t admit that the market sometimes goes down.
But the promise of a life free from thought, effort, risk or responsibility is an illusion — an illusion that will come crashing down, in the long term, when Social Security goes bankrupt. And the bursting of that bubble will be far more damaging than any bear market on Wall Street.
