Social Security is the bedrock of nearly every American’s retirement plan — the steady, dependable stream of income they can count on to guarantee them a basic standard of living in old age.
But that foundation is now in jeopardy. According to the Social Security trustees, the program’s primary trust fund is on track to be depleted before the end of the next president’s term. If no action is taken, beneficiaries face an automatic 22% benefit cut.
This structural shortfall is evidence the system needs serious reform. But privatization is a false solution that would make retirement less secure for seniors while saddling workers with higher taxes and debt.
Investing in stocks and bonds is a good way for individuals to build wealth for retirement, but it carries some inherent risk. Social Security, on the other hand, is intended to carry no risk — retirees are supposed to get the same monthly check whether the S&P 500 is shooting to the moon or cratering. Tying its benefits to volatile market returns would obviously make them even less reliable than they are under the current system.
Privatization advocates try to address these concerns by proposing taxpayers continue to fund current benefits until the returns on investments grow large enough to fund benefits by themselves.
That theory may have been plausible back in the 1990s when Social Security was running annual surpluses, and privatization plans were gaining popularity. But now, there simply isn’t enough money flowing into the system to make the idea feasible. That’s because all the revenue the government collects in payroll taxes from today’s workers is used to pay benefits for today’s retirees.
To make privatization work, the government would need to use some combination of borrowing and higher taxes to both cover the existing shortfall and make the initial investments into private accounts.
Borrowing to cover the shortfall would be dangerous and counterproductive. After all, the whole point of fixing Social Security’s finances is to prevent the explosion of our national debt, which the federal government is already spending more than $1 trillion per year to service — that’s more than it spends on Medicare or Defense. The more our government borrows, the more expensive that cost gets and the greater chance it has of triggering a calamitous debt crisis.
Borrowing to buy stocks would also be counterproductive since the returns likely wouldn’t cover the cost of servicing the new debt, as shown by an analysis published last month by the Center on Retirement Research. In other words, deficit-financed privatization is more likely to make Social Security’s financial woes worse, not better.
The alternative – raising taxes on current workers by more than a third to fully fund both current benefits and investments into private accounts – would be massively unfair. Social Security is supposed to be a benefit people earn. If policymakers ask today’s workers to foot the whole bill for the amount today’s retirees underfunded their benefits, how can that premise possibly persist? It’s particularly problematic considering that seniors in the United States already have a higher income relative to their country’s workers than seniors in social democratic states like Sweden and Denmark.
The intergenerationally fair approach to Social Security reform would both increase revenues and slow the unsustainable growth of benefits. Because the current formula gives the biggest benefits to the people with the highest lifetime earnings, benefit reforms can reduce costs without jeopardizing retirement security for vulnerable seniors – preserving the program as a foundation people can depend upon.
For example, I have proposed that Social Security could – as one part of a balanced reform package – replace the practice of awarding higher benefits to people with higher lifetime incomes altogether. Instead of measuring one’s contribution to Social Security by how much income they paid taxes on, the program could award benefits based on how many years they worked. This change would avoid giving the biggest benefits to those who need them least, while maintaining the concept of Social Security as a benefit people earn through their work.
My proposal is just one approach to Social Security reform. Policymakers can choose a different mix of tax increases and benefit cuts to strengthen the program for current and future retirees. But privatization is not a get-out-of-hard-choices free card – it’s a dangerous gimmick that would jeopardize retirement security and our economy more broadly.
