So You Think You Want to Dump Social Security for a Private Retirement Account? Think Again.

There appears to be an attempt by those on the political right to divide and conquer voters amongst older and younger generations in an effort to eliminate the Social Security trust fund we have benefitted from for 75 years.  These anti-government forces are employing many of the messages they have used previously to scare today’s workers under 40 into thinking that the payroll taxes deducted from their paychecks will not sustain the program when their time comes to retire.   Don’t fe fooled.  The facts favor sustaining this vital program while rejecting any privatization of it.

Will today's young forsake their futures as well as their parents and grandparents?

Ever since the Social Security Trust fund was implemented during the 1930’s, there have been those in the private sector and their dutiful plants in Congress that have tried to undermine this program.  Less than two decades ago it was reported in the NY Times how Wall Street’s big brokerage firms were, inescapably, at the center of the debate to shift Social Security toward the private markets.  “They view changes in Social Security as an opportunity to sell billions of dollars in financial products directly to the Government or to individuals. Wall Street is eager, however, to avoid playing too prominent a role in the debate, out of fear of setting off a backlash that would weaken its position in Congress” according to Leslie Wayne who filed the report back in December of 1996.

They have pretty much employed the same tactics over the years to misrepresent the success and utility of this entitlement program by one of the following ways:

  1. It’s a Ponzi scheme
  2. It increases the national debt
  3. It’s broken and soon  will be in default, or
  4. The government cannot cost-effectively run such a program

To an unlearned public who seems to be dumbing down over the years these arguments have their appeal.  There tends to be a small element of truth to them but when exposed to sunlight they fall apart with the facts next to them.

  1. Is Social Security a Ponzi Scheme?

According to the U.S. Securities and Exchange Commission:

    A Ponzi scheme is an investment fraud that involves the payment of purported returns to existing investors from funds contributed by new investors. Ponzi scheme organizers often solicit new investors by promising to invest funds in opportunities claimed to generate high returns with little or no risk. In many Ponzi schemes, the fraudsters focus on attracting new money to make promised payments to earlier-stage investors and to use for personal expenses, instead of engaging in any legitimate investment activity.

Dean Baker, a macroeconomist and co-director of the Center for Economic and Policy Research , informs us that those who would compare Social Security to a ponzi scheme do so “quite deliberately intended as a slander against the integrity of the program. It has no meaningful basis in reality.”  Unlike a ponzi scheme the resources are transparent at all times.

Social Security may rely on future generations to contribute to existing beneficiaries but the money is never used for any one person’s personal gain.  The money goes into a trust fund and when there are surpluses it is invested in one of the most secure financial products in the world – U.S. Treasury Bonds.  It’s a self-perpetuating, pay-as-you go plan that everyone benefits from when they retire.  In a ponzi scheme, only a few initial investors get some return on their investment while all others lose out.  The original ponzi scheme that occurred back in the 1920’s lasted about 200 days.  Social Security has sustained itself for 75 years and most of the years have seen surpluses in the trust fund.  Read more on this here.

2.  Without Social Security the Debt would sky rocket.

In his Op-ed piece this last January, Bob Herbert noted that “the Economic Policy Institute has explained, Social Security ‘is emphatically not the cause of the federal government’s long-term deficits, since it is prohibited from borrowing and must pay all benefits out of dedicated tax revenues and savings in its trust funds.’ ”

Let’s be clear about how people mislead others on the connection between social security and the debt.  The funds from social security are separate from any other federal tax and almost always are sufficient to cover the benefits they were designed for.  Until last year the social security trust fund ran on surpluses since 1983 and even back then lawmakers made some changes that put the program back into solvency.  These surplus funds are often used by Congress to pay other federal debt and once they are used then that loan is considered a debt to the national treasury.  It’s money, earning interest, that has to be paid back to the trust fund but to say it’s a cause of debt is like saying that a solvent bank that extends credit to people and businesses is losing money for investors.

If these funds were depleted by privatizing social security then the U.S. government would have to find other sources to borrow from and according to the Center on Budget and Policies Priorities this would “substantially increase federal debt and interest payments.”    Those who oppose social security like to claim that “there is no money in the Social Security Trust Fund, it has all been spent”.  Technically this is true if you are talking about liquid cash.  But the value of the trust fund currently sits somewhere near $2.5 trillion in the form of Treasury bonds that are secured by the full faith and credit of the U.S. government as spelled out in Article IV of the U.S. Constitution.

3.  The bogus claim by Tea Party Republicans like South Carolina’s Jim Dement that “most people know that Social Security is bankrupt” is not based on fact.  Leaving things as they are now, the Social Security Trust fund can fully cover benefits for at least 25 more years.  If nothing is still done then it will still be able to fund as much as 75% of social security benefits for another 25 years.

This tells you that social security needs to address future shortages that will be a partial result from the retirement of large numbers of baby boomers but it is a far cry from being bankrupt and with a few modifications to how revenue accrues for social security without seriously impacting most working incomes today, this shortage can be addressed to insure full benefits will continue through the better part of this century.

4.  If government is such a failure at things by the standards of many on the right then it is surprising that we have survived for 225 years as a nation under the Constitution.  Social Security has been around for 75 years and paid out steadily during economic lows and under changing social conditions.

“If we didn’t have Social Security, we’d have to invent it right now,” said Roger Hickey, co-director of the Campaign for America’s Future. “It’s perfectly suited to the terrible times we’re going through. Hardly anyone has pensions anymore. People’s private savings have taken a huge hit, and home prices have been hit hard. So the private savings that so many seniors and soon-to-be seniors have counted on have just been wiped out. SOURCE 

Blaming government as most conservative tend to do is simply a straw man argument often intended to conceal much of the malfeasance that goes on behind the corporate welfare state.  Try as you will it is impossible to lay the total blame of the current great recession at the feet of government except where those legislators we elected to protect the public’s interest failed to do so by de-regulating businesses that allowed them to freely engage in practices that undermined the credit system in this country.

Those who beat the anti-government drums do so at the behest of the wealthiest .01%.  At the same time this elite group is benefitting very well from their association with elected officials they helped put in office,

The dramatic increase in economic inequality and poverty, along with the unprecedented rise in wealth within the top one-tenth of one percent of the population has not happened by mistake. It is the designed result of deliberate governmental and economic policy. It is the result of the richest people in the world, and the “too big to fail” banks, using the campaign finance and lobbying system to buy off politicians who implement policies designed to exploit 99.9 percent of the population for their financial gain. To call what is happening a “financial terrorist attack” on the United States, is not using hyperbole, it is the technical term for what is currently occurring.”  SOURCE

Read more about this attitude by those on the extreme right in Professor Douglas J. Amy’s article on “Why Government Becomes the Sacpegoat” 

What Path Should You Take in Determining Your Retirement Future?

These ugly scenarios that opponents of social security keep repeating over and over are not intended to bear witness to the truth.  They are devices that are purely meant to gain support so that the vast sums of your tax payer dollars that keep this program alive on its own merits can be re-directed into the coffers of for-profit institutions who take part of your money for custodial fees then invest the rest in the volatile stock market.

Those who seek to privatize social security will give you a sells pitch that is aimed to assuage your sense of independence but really doesn’t divulge how you will successfully manage the many traps and pitfalls inexperienced market investors succumb to.  Therefore you are forced to contract with a broker who does this for a living.  But even these professionals cannot predict the daily turn of events that emotionally effects the reactions of market traders.  How is this better than a deposit of a specific amount that will never diminish?

If today’s youth are convinced to go along with this pipe dream being offered by the conservatives in politics and in the media, they stand to be worse off than had they kept faith with the Social Security trust fund.  In total numbers, only a small minority “make a killing” in the stock market and unless you have the initial wealth to make risky investments and have a pretty thorough understanding of a complex global economy, you’ll find your self at the mercy of others who may or may not make the best moves in your interests.

What you invest privately is diminished by broker fees and your returns will never be certain with the huge swings that occur regularly in private mutual funds like 401k’s.  It’s safe to say that over time you will see gains in your investments if the risks are spread out in several areas.  It also safe to say that you can loose as much as one-third to half of your investment, as I did, in a short period of time when markets really go bad as they did after the internet bubble burst in 2001 and the housing bubble did the same in late 2007.  As a result your ability to see constant steady growth in those years leading up to your retirement is non-existent and it’s a roll of the dice if you make it to that point in life without any great losses to your portfolio.

Jared Bernstein, senior fellow with the Center for Budget and Policy Priorities tells us that “Retirement security must be a goal of a civilized society in an advanced economy.  And in fact, this is the case in every advanced economy.  A guaranteed pension is essential to meeting that goal; private plans that depend on stock market returns can surely complement a basic guarantee, but they are simply not compatible with the goal of retirement security.

Clearly both a private savings account in the form of a mutual fund and continued investments each pay check in the secure social security trust fund is the wisest way to go.  The likelihood that your government retirement program will fail you before your private investment in an uncertain global market is a myth that only other’s would contrive whose own self-interests depend upon you buying into their financial plan, one that doesn’t have the full faith and credit of the U.S. government behind it.  But then if you think the people who ran Enron and AIG will always have your back, then by all means, make that choice.

Related Articles:

Republicans Call for Gutting Social Security, Adding Trillions to Debt

Social Security: Principles, Facts, and Fixes 

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8 responses to “So You Think You Want to Dump Social Security for a Private Retirement Account? Think Again.

  1. Larry, as usual a well thought out post…well done.

    Remember to that the GOP is attached by the sex organ to Wall Street….privatization would mean a boon to the profits of hedge funds and such…..

  2. I heard Rick Perry call it a Ponzi scheme. What people don’t understand is that we can privately invest our money but there is no guarantee that it will be there for us when we retire. I don’t know what started the bash social security movement. Why not improve it instead of dismantle it? What do Tea Party candidates have against senior citizens.

    • “What do Tea Party candidates have against senior citizens”

      Nothing really because most of them are at or near retirement and do in fact want to leave social security as it is for themselves at least. Most everything else the government does though they are opposed to except Medicare/Medicaid that they can’t do without but are ready to call it socialized medicine.

  3. Larry,

    You know what I used to say about this, but I’ve obviously changed my opinion. Social Security is a safety net that cannot be trusted to the whims of the market.

    • I’m glad you’re on board with this Terrance and I hope you convince many of your friends that it really is in their best interests to sustain Social Security as we know it and not buy into the fallacious arguments that scares them into believing that they are better off with a private account only.

      It is your generation that those financial corporate interests and ” their dutiful plants in Congress” have targeted

  4. Clearly both a private savings account in the form of a mutual fund and continued investments each pay check in the secure social security trust fund is the wisest way to go.
    Definitely. Privatizing is way too risky. The market can be as kind as she is cruel.

    Leaving things as they are now, the Social Security Trust fund can fully cover benefits for at least 25 more years.
    I hope this remains true and that politicians will not use the fund as their personal ATMs as they have in the past. That said, a lot of Gen-Xers like myself aren’t counting on it being there. I do the right thing – 401K and IRA, but that’s not guaranteed (see moody market above). Basically, my ideal retirement plan is to die young.

    • “I hope this remains true and that politicians will not use the fund as their personal ATMs as they have in the past

      It really doesn’t matter spinny how much they remove from the SS trust fund. It all converts to U.S. treasury bond as a debt that HAS TO BE repaid to the trust fund.

      The only thing that really hurts social security is when there are fewer contributors than there are recipients. That’s what’s going on now with the baby boom generation starting to retire and fewer workers to contribute the payroll tax that funds this. The high unemployment rates from this recession are making this more of a problem than the actuaries probably figured in. Thus, another reason to push harder for REAL job creation.

  5. Currently, we have a way to hedge our retirement investments. We pay into social Security, and we can choose to invest in private accounts as well. We need to fix social Security and keep it off limits to political pilfering.

    The logic that some far right people use is OK, however, the premises the arguments are based on are faulty. (eg- private investments are always good and government programs are always bad.)

    We need to educate young citizens on personal finance too. (Oh, wait. Public education? Another faulty premise- Public education is always bad.)

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