Retiring Social Security Featured

10:00am EDT July 22, 2002

Social Security was long-regarded by Congress as the third-rail of American politics—touch it, and you die. As equity investments swell into their 16th year of an unprecedented bull market, however, some are looking on Social Security as a golden goose—privatize it, and it could lay retirement nest eggs for the baby boom generation, and beyond.

“I don’t think any Social Security reform bill that does not include at least partial privatization could pass Congress today,” says Michael Tanner, director of health and welfare studies at the libertarian Cato Institute in Washington, D.C.

Congress convenes this month in an atmosphere uniquely cordial to the idea of moving billions of dollars contributed each year from the Social Security trust fund into private accounts that would be invested by or on behalf of wage and salary workers for their retirements. After extended dithering, President Clinton last fall signaled his willingness at least to consider some form of privatization.

Thinktank ideologues and bootstrap-conservatives in Congress in turn have backed away from their over-the-cliff insistence on total privatization, in light of political realities and demographic risks that obstructed their progress until now. The way isn’t yet clear, observers agree, but the floor is open for debate.

“There’s going to have to be some type of dual system [with Social Security maintained for retirees and risk-averse workers], and phased in, or [privatization] won’t work on any number of fronts,” says William Dennis, senior research fellow at the NFIB Foundation. Small business owners have been interested in reform of the system since Dennis started charting their concerns in the late 1970s.

For most, Social Security through FICA is the largest tax small business owners pay. A September 1998 foundation survey revealed nine out of 10 small employers believe the system has a long-term financial problem. Of those, nearly two-thirds called the problem “very serious.” Four out of 10 polled also believe the financial situation is perilous in the near-term.

That’s hogwash, according to Dean Baker, senior economist at the Economic Policy Institute, an independent thinktank specializing in labor issues. “Everyone is repeating what they’ve heard, rather than looking at the facts and figures,” Baker says. If Congress does nothing about the current situation, Social Security will remain solvent for 34 more years, Baker says. He believes proponents may have an agenda other than looking out for the retirement security of aging boomers. Placing 2 percent of annual Social Security payments into private funds (the most popular current privatization proposal) would translate to $80 billion a year invested in equity markets. The commissions alone on such a sum would be an enticement for some privatization advocates.

Dennis anticipates another risk: That privatization would be structured not so that individuals directed their own private retirement accounts to stocks and mutual funds, but that government would invest Social Security funds in private markets for them. “That clearly is an option,” Dennis says. The result would be the U.S. government holding a major stake in virtually the entire private-sector economy, with the risk that management and other decisions could be influenced by the political expediencies of the moment.

Baker worries about the potential for fraud and abuse. In Britain, which privatized its social security system earlier this decade, a massive scandal broke two years ago over fund managers making bloated or phony promises on returns.

Billions of pounds were lost; funds collapsed; some pensioners recovered only a portion of their investments. Government was forced to bail out the poorest among them. “That will happen” if Congress privatizes Social Security here, Baker insists. “The only question is, how much.”

Dennis’s constituents worry about the more practical issue of how they will set up and administer funds for dozens, hundreds or thousands of private retirement contributors who work as their employees each year.

The Employee Benefits Research Institute released a study last November outlining the administrative burdens, mirroring concerns raised in the NFIB study. Proponents argue that technology, combined with experience gained from running existing large retirement funds like the two million member Federal Retirement Thrift Investment Fund, would overcome these hurdles.