Advocate View: The Generational Equity Scam

In part one of a two part series on generational equity, we discussed the pros of privatizing social security. In part two we are going to talk about the cons of privatizing social security. Information has been gathered from Stephen H. Gorin’s essay, Generational Equity and Privatization: Myth and Reality, and from The Social Security Network, a “resource for information and research on the Social Security program and the debate about its future.”

Greg Anrig and Bernard Wasow of The Century Foundation list 12 reasons against privatization on the social security network’s site, I have pulled a few that I found to be the most interesting and added additional content from Gorin’s research as well to give a well-rounded, simplified view of the cons of privatization.

(1) Benefits are at risk. With workers contributing to IRAs, retirement benefits could be reduced as much as 30 percent.

(2) Creating private accounts would make Social Security’s financing problem worse. The rates of what is needed versus what will be available with time considerations for social security would mean that the private sector would have to lend to the government almost immediately in order to be able to fund retirees. Trust funds would be dissolved very soon.

(3) It isn’t working in Chile or the United Kingdom. In Chile and the United Kingdom, where privatization has been enacted, it has not worked. Predictions on investment accounts didn’t pan out as expected, so 41% of Chileans that are of age are still working.

In the United Kingdom, which began encouraging workers to divert payroll taxes to personal investment accounts in 1978, many citizens were victimized by poor investment choices as well as unscrupulous brokers. The national government was left with substantial new administrative expenses, lost tax revenues, and responsibilities to bail out some failed private pension plans. Indeed, the problems were so wide-ranging that even the most enthusiastic supporters of private accounts now say that the United Kingdom simply did not do it right (Social Security Network).

(4) Administrative costs will increase. With the increase of administrative costs, the outstanding sums would have to be paid for somehow. This could lead to the reduction of benefits, retirement age raise or the increase of the payroll tax.

(5) Survivors and those with disabilities are at risk. Privatization proposals do not take them into consideration. Their benefits are either cut drastically or there is no plan to raise the additional funds needed to keep up their benefits.

(6) What you receive will depend on the market. With the state of the market today, there is no reason to expound on this point.

(7) Young People would be worse off. Analyses were conducted by the Congressional Budget Office and a grouping of economists to investigate the difference between a plan that included privatization and one that did not. In all studies, they came to the conclusion that taxpayers would have a lower return rate under a privatized system than under the standard system of generational equity.

There is no question that any way you slice it, reforms to the current generational equity system are crucial. However, privatization may or may not be the solution. Those are the facts. You decide.

For more cons of privatization, please visit the complete listing here.