- Younger workers can wait out market dips, but those about to retire have less of a cushion against portfolio losses, making safer Social Security savings all the more important.
- If GOP survives the 2018 midterm elections still in control of both the White House and Congress, Social Security privatization may snake its way into the forefront again.
- Social Security is income insurance, while privatization would mean playing the markets with all the attendant risk.
As I began writing this column, the stock market was in the midst of another sell-off, this time in response to the announced departure of Trump economic adviser Gary Cohn and fears of an impending trade war. The Dow has dropped more than 300 points (or 1.3 percent) — and it's only lunchtime.
In February wage inflation and concerns that the Federal Reserve would raise interest rates spooked the market, kicking off a month of volatility not seen since the crash of 2008, when Americans' retirement funds lost trillions of dollars in value.
Of course, this is what markets do — they have bubbles, corrections and crashes. But the recent tumult on Wall Street serves as a stark reminder of the role that Social Security plays as a stable source of income, insulated from the inevitable fluctuations in private investments — including the 401(k) plans that many Americans increasingly rely upon in the absence of employer-provided pensions.
The volatility in the stock market also reminds us that privatizing Social Security remains a really bad idea, because it would subject every worker's lifetime contributions to the caprices of the market.
Most financial advisors counsel that temporary market volatility is no reason to abandon 401(k) plans, as they usually grow over time despite the normal ups and downs on Wall Street.
Younger workers have time to recover from the kinds of huge losses the market experienced in 2002 and 2008, for instance. For workers in their 50s or 60s and approaching retirement, however, such losses can be devastating and difficult to recover from — unless those older workers are willing to defer retirement for another five years to 10 years to make up for what they lost in the market.
The most serious attempt to privatize Social Security took place in 2005, when President George W. Bush decided to expend political capital from his successful reelection campaign on this longheld conservative goal. Seniors' advocates beat back Bush's privatization scheme through intense grassroots activism.
Privatization slunk away with its tail between its legs. Since then, most Republicans have been hesitant to advocate too loudly for privatizing the program, but it remains part of the party's ideological DNA, the current administration and leadership in Congress included.
If the GOP were to once again find itself in control of both houses of Congress and the White House after the 2018 elections, privatization may snake its way into the forefront of the Republican agenda.
A 2008 report from Center for American Progress Action Fund made plain the risk of gambling Social Security contributions on Wall Street. In the report, a hypothetical worker who diverted a portion of her Social Security contributions into a Bush-style private account (over 35 years) — and retired just after the stock market crash of 2008 — would have lost $26,000 in retirement income, compared to what she would have received by keeping her money in traditional Social Security.
In contrast to private retirement funds, traditional Social Security provides a guaranteed income, paying benefits every month for life — with increases for inflation. After adjusting for risk, Social Security has a rate of return equal to that of any mix of financial assets in private accounts. With more than 60 percent of beneficiaries relying on Social Security for at least half their income, it makes no sense to gamble Americans' future Social Security benefits on the roiling forces of the market.
Instead of providing a secure, defined benefit as Social Security now does, privatizers would encourage workers to gamble a growing percentage of their payroll contributions on private investments. As the proportion of private investment increased, the amount of a worker's defined Social Security benefit would decrease — until it reached what could only be considered a poverty-level amount. Of course, the worker would reap any gains in the privately invested funds, but would also risk losing some or all of it, leaving little or nothing for retirement.
To lay the groundwork for any new attempt to privatize the system, the political right would no doubt ratchet up its rhetoric about Social Security going "bankrupt" and needing "modernization," even though there are modest and manageable measures to keep the system solvent for most of the rest of this century — without putting retirees' benefits at risk.
In fact, as the Washington Post noted in 2012, "The Congressional Budget Office (CBO) found that diverting payroll taxes into private accounts would not improve the health of Social Security — unless the plan included sharp payroll tax hikes and benefit cuts."
Privatization is not a plan to save Social Security. It is a plan to dismantle Social Security.
That should alarm future retirees, whom the political right is trying to dupe into believing that privatization is the only path forward. Social Security and private investments are two different things. One is income insurance and the other, playing the markets with all the attendant risk.
The two should not be confused, conflated or intermixed — much as some in the administration and Congress would love to see Wall Street get its hands on Americans' hard-earned Social Security contributions.
— By Max Richtman, president and CEO of the National Committee to Preserve Social Security and Medicare and former staff director of the Senate Special Committee on Aging