Commentary

Just Who is Afraid of Privatization?

By Andrew G. Biggs
June 3, 2002

What’s in a word? Plenty, if that word is “privatization.” The latest election-year battle over Social Security reform has Democrats demonizing the term “privatization” and applying it to Republican proposals to let workers invest part of their Social Security taxes in voluntary personal accounts. Republicans, predictably, insist their plans are anything but privatization.

In one sense, this debate is a tempest in a teacup: what matters are policies, not the label attached to them. But words influence how people think about issues, and the public deserves to know what personal account proposals actually entail. And the truth is much less scary than account opponents would have us believe.

Like most things in politics, the brouhaha over the P-word begins with pollsters. Roughly two-thirds of working-age Americans favor the option to invest part of their Social Security taxes in a personal retirement account. However, apply the “privatization” label to personal accounts and support falls, particularly with older voters who loom large in off-year elections. Knowing this, Democratic strategists are playing the P-word to the hilt.

Republicans, being no fools, describe their plans as “reform,” “choice,” “voluntary personal accounts,” or simply “strengthening Social Security.” (Though Sen. John McCain, R-Ariz., always the lone wolf, continues to use the P-word.) The GOP may even have a formal vote in Congress against “privatization” to inoculate themselves against campaign attack ads.

In fact, actual reform proposals such as those from the President’s Commission to Strengthen Social Security entail almost none of the laissez-faire, dog-eat-dog, sink-or-swim capitalism the word “privatization” conjures. The Cambridge International Dictionary defines “private” as “not connected with, controlled by, or paid for by the government.” Would a reformed Social Security program remain “connected with, controlled by, or paid for by the government”? For better or worse, the answer is yes.

For instance, would personal account reform plans shut down the current program, leaving today’s seniors to fend for themselves? No. All reform proposals from the president’s commission guarantee benefits for all retirees and near-retirees. For anyone aged 55 and over, nothing would change - nothing.

Likewise, would personal account plans undermine Social Security’s safety net? No. Under plans from the president’s commission, the safety net would be strengthened. Minimum-wage workers would be guaranteed to retire above the poverty line, lifting up to one million seniors out of poverty, according to Social Security’s actuaries. Commission proposals also increase benefits for as many as two million to three million below-average-wage widows. The commission proposals mean fewer seniors in poverty, not more.

Would personal accounts reduce Social Security’s progressivity? Again, no. Commission plans offer progressive personal accounts giving larger account balances to lower-wage workers. Combined with the enhanced safety net, progressivity would increase. Here’s the proof: Today, a low-wage retiree’s monthly benefit equals 46 percent of a high-wage retiree’s. Under one commission plan, that figure would rise to 56 percent, substantially increasing progressivity.

Could workers with personal accounts stop paying into Social Security, or gamble their savings on risky stocks, or withdraw their savings prior to retirement? Hardly. All covered workers would continue to pay into Social Security. Unlike today, though, workers could create true savings and wealth in personal accounts that they own and control.

Accounts would be modeled after federal workers’ Thrift Savings Plan, allowing only simple, diversified, low-cost mutual funds, not day trading in individual stocks. Withdrawals would be restricted to retirement, except in the case of the death of the worker.

So what would personal accounts mean? Social Security’s nonpartisan actuaries confirm that commission personal account plans would restore Social Security to solvency and pay substantially higher benefits than the current system could afford. Moreover, workers and retirees would have a true legal right to their retirement savings, in an account that can’t be “raided” by the government to pay for other programs. Accounts give all Americans the chance to build wealth and to pass it on, turning a mere entitlement into a true asset. Personal accounts mean more safety and security, not less.

Americans should forget about labels and insist that both sides explain in detail how they would strengthen Social Security for the future. Account opponents decry “privatization.” But will they raise taxes? Cut benefits? Increase the retirement age? Let the government itself invest in the stock market? We can only guess because they refuse to disclose their own reform proposals. Until account opponents put their own plans on the table, there is only one label that can accurately describe their Social Security proposal: “bankruptcy.”

Andrew Biggs is a Social Security analyst at the Cato Institute and a former staff member of the President’s Commission to Strengthen Social Security.