Friday, August 24, 2012

Privatizing Social Security?

Michael Hiltzik has a column in the LA Times entitled Proposal to Privatize Social Security Rears its Ugly Head Again - basically an election-season partisan piece attacking Mitt Romney and Paul Ryan for referencing privatization in their campaign rhetoric and pandering to their base.

I am moderately skeptical about privatizing Social Security, mostly because I am skeptical about any proposal to "solve" once and for all the inherent, unavoidable problems with government-provided (or even government-facilitated) retirement benefits - future costs and revenues are simply too unpredictable in a country as large and complex as the United States. I also worry about how a regime of mandatory savings/investment could distort the stock market itself and undermine normal free market competition among firms soliciting investors.

But I'm even more skeptical about how seriously we should take any Presidential candidate's campaign speech points about how to fix Social Security; this is a feature of every election cycle that seems to come to nothing after the election.  Reforming Social Security will be almost entirely a Congressional task, with the President involved only on the sidelines, as a cheerleader for his party's legislators.  Social Security reform would be even more controversial than health care reform; Republicans would probably need a supermajority in each house in order to make drastic changes.  So I am always a little mystified when people are either alarmed or enthused about a Chief Executive candidate - from either party - promising to fix Social Security unilaterally. It's not really within the President's powers, and it's probably not possible in any case. It seems more worthwhile to pay attention when candidates talk about things the President can do - Supreme Court nominations, appointing the Fed Chairman, ordering military interventions overseas, or prioritizing certain types of immigration enforcement.  The President does not directly raise or lower taxes, create or destroy jobs (apart from White House staff), or reduce poverty - on these issues, he is mostly confined to exercising his veto power after Congress enacts its own political compromise.

There's another source of my skepticism about most of the privatization rhetoric - retirement benefits are only a portion (albeit the largest portion) of the SSA's disbursements.  According to the SSA's latest statistics, more than one-third of the benefits paid out in a month are under the disability and survivorship programs, which would be entirely unaffected by privatized retirement plans (almost $20 million per month goes to these non-retiree beneficiaries - disbursements outside the reach of any privatization plans). Assuming we did privatizing retirement benefits, and that it reduced the SSA's spending on the program significantly, the proportion of disbursements going to disabled workers and survivors would become that much greater of the total pie, creating a new host of policy issues and political debates.  In addition, SSA has claimed in the past that 85% of its own agency overhead is spent on the disability program, which requires more than one million  formal adjudicative hearings per year for determining eligibility.  If this is true, then any savings in administrative costs brought by privatizing retirement benefits would affect only a small portion (15%) of SSA's overhead, not a very significant difference.

 - Dru Stevenson

UPDATE: for readers interested in evaluating various plans and proposals for Social Security reform, the FixSSNow website is even-handed enough to post a broad range of proposals for their readers to peruse, which I like. Lots of useful information there on this issue.  Discussion of this post occurs at here.


  1. Most of the proponents of private accounts don't really want a private account. They want out of Social Security and see a private account as a step in that direction.

    I am interested in which privatized plans allow you to get survivor benefits. I would have thought that would have been covered by the inhertibility of the account.

    1. Here are some helpful links from SSA explaining survivor benefits (for children, dependent parents, spouses, and ex-spouses):

      From a legal standpoint, survivor benefits are not really "inheriting" an account - SSA benefits do not follow state inheritance laws, and the calculations for determining benefits are related to the retirement benefits amount, but are not the same (they are only a percentage of what the decedent would have received as a retiree; the survivor receives benefits indefinitely, while the retiree's benefits end at death; and benefits are available to survivors of younger workers who die (who would not have been eligible for retirement benefits and have not paid in very much yet).

      As I said, I'm not a huge fan of the current system, but I think most of the privatization advocates misconceive of Social Security as a savings vehicle (an investment) rather than an insurance program (risk management). Much of the debate ignores the real underlying problems with an insurance program (public or private), namely moral hazard and adverse selection, and focuses instead on problems inherent in savings plans (rates of return, capitalization, inflation and other factors in the discount rates, etc). But the programs was designed as a form of insurance, not a form of savings.