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Social Security Privatization: A Bad Deal for Public Employees

Social Security Privatization Would Harm Public Pensions

Efforts to dismantle Social Security echo the attacks on public employee defined benefit pension plans. Proponents of Social Security privatization and defined contribution pension plans are using the same erroneous contentions. If Social Security is changed to include privatized accounts, we should expect more efforts to convert public employees' defined benefit pension plans to defined contribution plans and reduce benefits for retirees to follow. Guaranteed Social Security benefits can and must be saved.

Private Accounts Lack the Important Social Insurance Properties of Social Security

Social Security adjusts for inflation; is guaranteed to last an entire lifetime, no matter how long; is shielded from stock market losses; and is payable to multiple beneficiaries across generations (such as to surviving family members for their lifetime). Private accounts and defined contribution pension plans have none of these protections. Workers investing in private accounts will assume responsibility for the risks that are currently covered by Social Security protections. This is bad public policy and could lead to many retired employees needing extra support in their elderly years -- a time when they should live with a sense of peace and security.

Private Accounts Would Turn Social Security into an 'Individual Insecurity' Program

Rather than just shifting "ownership" of retirement assets from the government to workers, Social Security privatization shifts an inordinate amount of risk away from the government and onto American workers. The United States' experience with defined contribution pensions and 401(k) plans shows that many people fail to understand even the most basic aspects of investment and that many make bad investment decisions (such as failing to diversify their investments). Unfortunately, many people simply do not have adequate financial experience, training, or time to do a good job managing their own accounts. (Alicia Munnell, "We've Already Tried Private Accounts!" in The American Prospect , January 2005; Reason #5 in Greg Anrig Jr. and Bernard Wasow, "Twelve Reasons Why Privatizing Social Security Is a Bad Idea"pdfsmall.gif PDF, 14 pp, December 2004.)

Private Accounts Would Primarily Benefit Wall Street

The push to privatize Social Security is a risky scheme for America, but a sure bet for the financial services industry. The financial services industry has been in favor of private accounts because Wall Street can make huge brokerage fees on the billions of dollars that will be invested in private accounts. A University of Chicago economics professor has estimated that the net present value of payments of financial fees to private companies would be $940 billion over 75 years, the largest windfall gain in American financial history. (Austan Goolsbee, "The Fees of Private Accounts and the Impact of Social Security Privatization on Financial Managers"pdfsmall.gif PDF, 8 pp, September 2004.) The Securities Industries Association, in whose interest it is to minimize the fees it says it will collect, has estimated that the financial industry would make just $39 billion over 75 years. (Heidi Przybyla, "Companies To Spend Over $5 Million To Back Bush on Social Security" in Bloomberg News, January 20, 2005.)

Management fees add up over the life of an individual's account. The Congressional Budget Office (CBO) estimates that the administrative costs under the current Social Security system reduce a worker's account asset balance by only 2 percent at retirement. For example, the CBO estimates that the average annual administrative cost of a mutual fund that received 2 percent of taxable earnings is 1.09 percent, and would result in a 23 percent reduction in a worker's account assets at retirement. (CBO, Administrative Costs of Private Accounts in Social Securitypdfsmall.gif PDF, 26 pp, March 2004.)

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