Monday, December 13, 2010

Privatizing Social Security

Allan Sloan in an opinion piece published in Fortune (“Let’s Talk Turkey About Privatizing Social Security,” December 6, 2010, p. 83) surprisingly – for a magazine known for its conservative, pro-capitalism views – argues against privatizing Social Security.

Retirees, according to Sloan, should not have to depend upon the market’s vagaries for economic survival. More than half of all married couples and almost three quarters of singles over 65 years of age depend upon Social Security over half of their income. Even more striking, one out of five married couples over 65 and four out of ten singles over 65 depend upon Social Security for 90% or more of their income. Knowledgeable statisticians believe that pattern unlikely to change.

Sloan identifies two types of risks that people will face if the government does privatize Social Security. The first is investment risk. Most people lack the skills to invest well, a conclusion underscored by study after study reporting that mutual fund investors tend to buy high and sell low, the opposite of profitable investing. The second is interest rate risk, i.e., that interest rates will be low when people convert their savings into an annuity.

Of course, in some circumstances privatization creates winners. If the conversion to an annuity occurs when interest rates are high, if a person dies before retiring their heirs would inherit a privatized account, and if a person is a great investor, then privatization would benefit those individuals. However, Sloan contends: “Social Security isn’t supposed to be a gambling program, or a wealth-building program. It’s an intergenerational social insurance program, in which we make sure our parents don’t have to depend on food banks and homeless shelters when they get old, and we hope our kids do the same for us. Change that into an investment program, and higher-income people will have an advantage over lower-income types because they won’t need immediate retirement income and can wait out markets. By contrast, regular Social Security favors lower-income people – as it should.” (I added the emphasis.)

I found Sloan’s article refreshing and disturbing. His views were refreshing because they transcended the polarizing rhetoric that characterizes so many public policy debates in the United States. We rightly prefer reliance on private effort and capitalism to government programs in general. But no individual exists as an island. For better or worse, humans belong to community and communities have responsibilities for their members. One of those responsibilities is ensuring the community’s security, a responsibility that few people would recommend privatizing, i.e., the military that provides defense against external threats is an inherently governmental function. Similarly, providing some measure of internal security – education for all children (the community’s future), criminal justice (internal physical security), access to basic healthcare, and minimum economic resources for the elderly – is an essential community responsibility.

His article was disturbing because I had hoped that privatizing Social Security was a dead issue. Privatizing, in addition to creating the winners and losers mentioned above, will primarily benefit investment management companies, investment advisers, and related businesses. Few employees of these entities (if the business is at all successful!) are likely to be among lower-income people (exceptions to that generalization might include janitorial and clerical staff, though many of these functions may now be outsourced).


Wormwood's Doxy said...

We rightly prefer reliance on private effort and capitalism to government programs in general.

Who is this "we" of whom you speak? ;-)

George Clifford said...

Good question. I'll respond next week.