Privatizing Social Security -
Dan Cornwell

Social Security is social insurance, providing a safety net in case of disability, old age, or death of the worker. To serve this purpose, its benefits must be predictable, inflation-proof, and progressive. The present system meets all of these criteria. A privatized system meets none of them.
There are two structural differences between the current system and a privatized system. One is in the method of funding. In the current system, the funding of benefits is "pay-as-you-go", so called because dollars that come in from the payroll tax are quickly paid out to beneficiaries. A privatized system requires advance funding of the benefits. If the current level of benefits were advance-funded, investments of $10 trillion would be needed, as compared with three or four-tenths of a trillion for a pay-as-you-go system.

The second structural difference is that the invested money in a privatized system would be divided into individual accounts, one for each worker.
Wall Street is behind the push for privatization because of the enormous profits to be made in the management of these accounts. Advocates claim that the benefits would be higher, but they overlook the huge cost of setting aside funds for investment while continuing to support the existing system, and they ignore the high cost of operating a system of individual accounts. In truth, a pay-as-you-go system can provide higher benefits than can a system based on investment accounts.

Some opponents of privatization argue for going part way: They would build up the trust fund but not divide it into individual accounts. That is a poor strategy, because it already takes the step that would be the hardest part of privatizing. Once the fund builds up, it may be difficult to resist pressure to divide it into individual accounts.

The surest way of fending off privatization is to preserve pay-as-you-go funding. But in addition, opponents must deal with the projected shortfall in funding. Economic projections are uncertain, but the trend of increasing longevity is almost certain to continue. This trend combined with a fixed retirement age, leads to an ever-increasing ratio of retirees to workers. We can deal with this by indexing the full-benefit retirement age to longevity. Doing that can preserve our system, with its progressivity and reliable funding, for the indefinite future.