Social policy today 597Republicans favor moving part or all of the “pay as you go” system to private accounts.
The central argument in favor of private accounts is that over the long term investing
in the stock market has historically provided returns higher in value than the Social
Security checks that people can expect to receive. Also, with private accounts, all assets
in the account are owned by the individual and that person’s heirs, whereas with Social
Security, when an individual dies that person’s heirs do not receive any additional
benefits from his or her lifetime contributions to Social Security (but a surviving spouse
continues to receive benefits from those contributions that will vary depending on
the couple’s work histories). Advocates argue that if all workers were able to take their
6.2 percent payroll tax and put that in a retirement account, they would have a modest
nest egg by the time they retired.
Democrats point out the problems with this approach—most important, the
transition costs. Because the current system is “pay as you go,” if we stopped taking
payroll taxes and allowed people to put the money into private accounts, there wouldn’t
be any money to pay for today’s retirees and everyone else who has paid into the system
for a substantial number of years. These transition costs are estimated to be $7 to
$8 trillion!
A second criticism of privatization is that Social Security should be a part of
everyone’s retirement plan that they can count on. Investing in the stock market is fine
as a supplement to Social Security, but it is too risky to be counted on as a sole source
of retirement income. Although it is true that the stock market outperforms other
investments over the long haul, there have been periods as long as 20 years when stock
market returns have been flat. So if you happened to retire at the end of one of those
slumps, you could find yourself with a much smaller nest egg than you had counted
on. Finally, critics point out that the administrative overhead costs of these private
accounts would eat up any additional returns that they might earn.
These issues are not likely to be resolved anytime soon, which illustrates that
politics is conflictual. Social Security reform can pit one generation against another or
wealthy people against poor people. The stakes in Social Security are extremely high
because it is the most popular and visible social program, which makes it all the more
difficult to handle.Obama’s bipartisan commission,
which included the Debt Commission
chairmen Erskine Bowles
(left) and Alan Simpson, made
recommendations to Congress and
the president about how to fix Social
Security. Despite the bipartisan
nature of the commission and its
recommendations, no reforms were
implemented.Full_17_APT_64431_ch16_572-613.indd 597 16/11/18 11:28 AM