Why We Shouldn't Privatize Social Security

Proponents Ignore the Real Issue

Why We Shouldn't Privatize Social Security
October 21, 2015

The idea of privatizing Social Security largely thrives on the fringe of American politics. The far left wants you to believe that Wall Street wants to denude the Social Security with fees and market risk. (“Oh my! Bankers at Tara!”) The far right wants you to believe that your retirement is being stolen by Congress to pay for limo-riding welfare queens.

For all of the impassioned exchanges, the privatization of Social Security is a dead issue. The conversion of Social Security into a system of personal accounts would cost more than $10 trillion. It is now actually more expensive to privatize the system than to allow it to deteriorate under current law, which will automatically reduce benefits once the Trust Fund is gone.

To privatize Social Security, someone would have to pay $10 trillion in some type of incremental taxes in order for anyone to keep their 12.4% payroll taxes. Does anyone really care what the government calls the tax when you will lose more than you get to keep?

Neither of the extremist views is serious and both arguments ignore the obvious: privatizing Social Security is a bad idea – even if we could afford it.

From a policy perspective, privatization transforms Social Security from insurance into a system of forced-savings. Insurance is an expense designed to manage risk. Savings is an investment meant to profit from taking risk. These are not the same thing.

Social Security is theoretical insurance, a hedge against the cost of the unknown. We don’t know how long we will live so we get a pension like Social Security. Similarly, we don’t know how many auto wrecks we will have, so we buy auto insurance. Pooling risk is simply a better way to deal with the cost of the unknown.

The math is not complicated. In a system of personal accounts, every person must save sufficient wealth to fund how long a retirement might last. In an insurance model, the system needs only to create enough wealth to fund how long the collective retirement actually lasts. If savings were the best way to manage risk, we would all have personal auto wreck accounts.

Insurance pools risk to manage the cost of the outliers. The argument for personal accounts on the other hand is framed for the average person. Yes, an average person might have more money at retirement. In the same way, the personal auto wreck account funded with insurance premiums would offer more than the auto insurance policy – provided that you don’t have an accident in your car.

Michael Tanner of Cato Institute illustrates the problem. He claims, "…even in the worst case scenario – a low-wage worker who invested entirely in bonds – the benefits from private investment would equal those from traditional Social Security." Understand that his worst case is someone making roughly $25,000 in a career that lasts forty years. This isn't remotely close to the worst case.

Privatizing Social Security is not a good idea and doesn’t fix the problems of the system, which are baked in from the past. Personal accounts can adjust the direction of the future, but they cannot change the promises of the past. Until you have $10 trillion, or the willingness to tell existing retirees to pound sand, the issue of privatization of Social Security is simply a distraction.

Photo ©iStock.com/zimmytws

  Conversation   |   22 Comments

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Erin | 10.21.15 @ 16:01
Great article. Thanks for stating plainly why it would not work.
Nancy | 10.21.15 @ 16:01
This is certainly a hot button issue today. Thanks for your take on the matter.
Elaine | 10.21.15 @ 16:01
Everything seems to have a political slant lately.
Daniel | 10.21.15 @ 16:02
Social Security has been a hot topic issue for as long as I can remember. always seems there are ideas how to work with it but none seem to be just right
Bobbie | 10.21.15 @ 16:02
Government needs to quit raiding Social Security funds like a piggy bank and return all the money they have already pulled out of it.
Sara | 10.21.15 @ 16:04
You know I have to agree with not privatizing it... there always is a debate about Social Security
irene | 10.21.15 @ 16:05
I'm really not expecting ss to be there by the time I'm old enough to collect
Carla | 10.21.15 @ 16:06
I just want the government to stop threatening us with losing our social security. As if we need something else to worry about as we get old.
steven | 10.21.15 @ 16:10
Social Security is always a big topic. It is good to see why privatizing is a really bad idea.
Sarah | 10.21.15 @ 16:10
The theories are always better than the application when it comes to this topic, sadly.
Steffanie | 10.21.15 @ 16:11
Interesting information
Britt | 10.21.15 @ 16:11
Interesting... I wouldn't have known any of that really.
Angie | 10.21.15 @ 16:15
Makes me realize that tightening the belt will be a way of life.
Kyle | 10.21.15 @ 16:15
Interesting. I know this is a hot topic , but i never knew any of that
Kailie | 10.21.15 @ 16:17
I don't particularly agree, especially since the Govt keeps cutting funds more and more from social security.
Leslie | 10.21.15 @ 16:19
I've always thought that privatizing Social Security was a bad idea. Thanks for this great article that explains why a lot better than I could have.
Chrisitna | 10.21.15 @ 16:30
This has always been an important issue. that needs some serious attention.
Owen | 10.21.15 @ 16:33
Great article. Would never work
Kathryn | 10.21.15 @ 16:36
This is good, but people have already been trying to bring this to attention for years..
Amanda | 10.21.15 @ 16:40
Leave Social Security for those that need it and stop borrowing and taking away from it. People work all their lives for now nothing to be paid to them.
STOKES | 10.21.15 @ 16:42
I privatized my own retirement a long time ago. I assume SS isn't going to be there for me.
Joe | 10.21.15 @ 23:15
I appreciate your time, and thoughts. I am the author and I am more than happy to respond to feedback on the article, particularly where something is not clear enough.
$commenter.renderDisplayableName() | 05.18.21 @ 07:36