Privatize Social Security? No

Henry J. Aaron
Henry J. Aaron The Bruce and Virginia MacLaury Chair, Senior Fellow Emeritus - Economic Studies

November 1, 2004

The purpose of Social Security is to assure basic income. No private account can achieve that goal. All owners of private accounts must bear the risk that asset values will fall.

In 2000-2001 when the NASDQ fell more than 70% and the S&P 500 fell nearly 50%, millions were reminded that this risk is terrifyingly real. Such a meltdown in the value of the basic income support for retirees or workers on the eve of retirement would be catastrophic.

Furthermore, post-retirement inflation erodes private pensions. Social Security, in welcome contrast, fully protects pensioners against inflation. That is another reason why traditional Social Security must be sustained.

Not only would privatization expose workers to risks they are poorly equipped to handle, it would subject their children to debts they should not be asked to bear. The federal budget faces deficits estimated at $5 trillion over the next decade. Diverting 2 percentage points of payroll taxes from Social Security into individual accounts would add just over $1 trillion to that.

The three privatization plans developed by a commission President Bush appointed to design ways to privatize Social Security would each add $4 trillion to government debt by 2040, according to the commission’s own estimates. Increasing government borrowing so recklessly would threaten the financial and economic stability of the nation. Siphoning off 2 percentage points of the payroll tax would also hasten the day when the Social Security trust fund is exhausted or benefits must be slashed.

Closing Social Security’s projected long-term deficit – sooner rather than later – is desirable. But rather than undermining Social Security by diverting payroll taxes into private accounts, Congress should move to buttress the system. A plan introduced by Rep. David Obey (D-Wis.) would do just that. It would increase from 85% to 90% the portion of earnings subject to the payroll tax, adjust benefits for inflation more accurately than current methods do and dedicate to Social Security revenue from a tax on estates in excess of $3.5 million. This would close all of the projected deficit over the next 75 years, as estimated by the Congressional Budget Office.

Saving in private accounts in addition to Social Security should be encouraged. But carving out payroll taxes to deposit in inherently risky private accounts would undermine the assured income that Social Security provides.