V I E W P O I N T

Myths and Realities about Social Security and Privatization

For 70 years the Social Security program has been protecting Americans against the loss of income due to retirement, death or disability. Over 154 million workers and their families are covered by their contributions to Social Security, and nearly 48 million Americans currently receive Social Security benefits.

Social Security is an enormously successful program which is essential to the retirement security of the vast majority of Americans. Social Security is the single largest source of retirement income. Two-thirds of Social Security beneficiaries receive over half their income from Social Security. For nearly 20 percent of retirees, Social Security is their only source of income. Without Social Security, nearly half of the elderly would fall into poverty. Social Security provides a sound, basic income that lasts as long as you live.

Despite Social Security's continuing successes, the program is under attack by those who would like to privatize it. President Bush has said that he wishes to divert money away from Social Security into private investment accounts. Young workers are intrigued by the idea of diverting their payroll taxes into Wall Street accounts. Proponents of privatization promise ownership of accounts and big investment returns.
They argue that Social Security is in a deep and immediate financial crisis that cannot be resolved without dismantling Social Security and converting it into a system of market-based individual investment. To support their arguments, proponents of privatization have used misleading arguments about the nature of Social Security, the crisis facing it, and the value of converting Social Security to private investment accounts. Here are some of the myths and realties surrounding the Social Security debate.

Myths and Realities

Myth 1: Privatization is a plan to save Social Security.
Reality: Privatization isn't a plan to save Social Security. It is a plan to dismantle Social Security. Private accounts do nothing to address Social Security solvency. In fact, because private accounts are financed by taking money out of Social Security, privatization actually increases Social Security's funding gap and moves forward the date of its insolvency from 2041 to 2030. The plan proposed by President Bush, which would divert two-thirds of the current employee-paid Social Security tax into private accounts, would cause an almost immediate cash-flow problem for Social Security.

Myth 2: Returns from private accounts will make up for the cuts in Social Security benefits.
Reality: Privatization results in huge cuts in Social Security benefits with no guarantee that private investment can replace lost benefits. The privatization plan favored by President Bush, known as the "price-indexing" plan, would reduce guaranteed Social Security benefits over time by nearly 50 percent, even for those people who do not choose a private account. For those who
opt for a private account, benefits would be reduced even further. Under the President's plan, an individual's already-reduced Social Security benefit would be cut by one dollar for every dollar that he or she has saved in the private account up to a limit specified in law. The Center on Budget and Policy Priorities has calculated that an average-earning individual, who chooses to keep his or her private account assets in a safe investment, earning the same return as U. S. Treasury Securities, will find that his or her Social Security benefit has been reduced to nearly zero. As a consequence, that individual will have almost none of the special protections afforded by traditional benefits. Moreover, his or her total income, consisting almost entirely of proceeds from the private account, would be 50 percent below currently-scheduled Social Security benefits.

Myth 3: Private account assets can be passed along to one's heirs.
Reality: Privatization leaves little to be passed on to one's heirs. The President's plan would force account holders, upon retirement, to use the assets in their private accounts to purchase an annuity sufficient to raise their total remaining Social Security benefits and monthly annuity payments to a poverty level income. The remaining assets in the account could then be used during retirement to make up for the plan's huge cuts in Social Security benefits. Only the excess after required annuitization and after expenses of retirement would be available to pass on to one's heirs. This is likely to amount to very little.

Myth 4: Private accounts are voluntary.
Reality: Private accounts may be voluntary, but the cuts are not. Even for those people who choose not to participate in a private account, Social Security benefits would be cut nearly in half. Under the plan favored by the President, known as the "price-indexing" plan, cuts in benefits would be considerably larger than necessary to solve Social Security's financing problem. Those cuts would effectively transfer money from those who opt out of accounts to those who opt in, forcing workers who decide against exposing themselves to the risks of Wall Street to subsidize those who are more willing to gamble with their retirement.

Myth 5: Privatization will exempt retirees and near retirees.
Reality: Retirees and near retirees should not count on being exempt. Because privatization diverts two-thirds of the employee-paid Social Security tax away from Social Security and into private accounts, Social Security's financial status is worsened and benefits for every retiree are threatened. In order to continue to pay benefits to retirees, privatization plans must borrow trillions of dollars over several decades from the general fund of the Treasury, causing an already huge federal deficit to balloon. This will increase the debt burden on all Americans, forcing policy makers to consider cuts in all federal programs, including Social Security.

Myth 6: Younger workers will receive a higher rate of return under a privatized system.
Reality: Younger workers will receive a lower rate of return under privatization than they will under Social Security. That is because younger workers will have to pay twice - once to fund the benefits of current retirees under Social Security's pay-as-you go system and a second time to fund their own individual accounts. The Congressional Budget Office concluded in a recent study that the costs of the transition to a privatized, prefunded system would reduce the rate of return on today's young people, the transitional generation, to a level lower than the rate of return on Social Security.

Myth 7: Private accounts will cost only about $750 billion in the first 10 years.
Reality: Private accounts will increase the national debt by nearly $5 trillion in the first 20 years after full implementation, and costs will continue to grow thereafter. The 10-year costs of the President's private accounts are misleading because those accounts are not fully phased in until 2011. According to the Center on Budget and Policy Priorities, private accounts will increase the national debt by nearly $5 trillion in the first 20 years after full implementation. After four decades, the additional debt resulting from privatization will reach more than 20 percent of GDP. This increased debt burden will fall on everyone alive today, especially those in younger generations.

Myth 8: The cost of fixing Social Security is over $13 trillion.
Reality: According to the Social Security actuaries, the 75-year cost of fixing Social Security is estimated to be $4.7 trillion (in present value). Some proponents of privatization set the cost of financing Social Security at $13.6 trillion. However, this figure is the liability of the system into infinity. It includes the costs of not just the baby boom generation, but everyone alive today and people not yet born.

The Realities About Social Security's Solvency
Social Security is a successful program that will be able to pay benefits for decades to come. This year Social Security has an accumulated surplus of over $2 trillion. By 2016, that surplus will be over $4.2 trillion or more than four times the amount needed to pay benefits in that year. While payments from Social Security will begin to exceed Social Security tax revenues in about 2017, Social Security will have sufficient reserves to pay benefits until 2041. Even after 2041, Social Security will have enough money to pay nearly 75 percent of the benefits owed, according to the Social Security actuaries.

The Congressional Budget Office has concluded that Social Security will be solvent even longer, through 2052, and will be able to pay nearly 80 percent of benefits thereafter. Moreover, Social Security money is held in the safest investment available - U.S. government securities. Those securities are legal obligations of the U.S. to pay principal and interest to the holder of the bonds. The securities have the same status as U.S. government bonds held by any other investor, including individual Americans and pension funds, and the Social Security Trust Fund has a legal obligation to pay full benefits as long as it has the funds to do so.

Conclusion
Many myths and misconceptions have contributed to the belief that Social Security is in imminent danger and that Social Security privatization is the answer. Nothing could be further from the truth. The reality is that Social Security will continue to provide millions of retirees a sound, stable retirement. It may require some modest adjustments over a period of time, but it does not face an insurmountable crisis requiring major structural changes. Privatization, on the other hand, will unravel Social Security's important insurance protections, force huge cuts in benefits, increase risks to retirees, and cost trillions of dollars. Social Security has been providing Americans a secure retirement for nearly three quarters of a century. With sensible action it can continue to provide that security for decades to come.

Government Relations and Policy, February 2008