Michael Richardson: Winners and losers of privatized Social Security

Now that the grand bargain seems to have foundered on the rocks of political intransigence, perhaps it is time to tackle reform of the basic Social Security program.  While a funding crisis is not imminent — the system is sound for well more than the next decade — the sooner corrective action is taken the less drastic and disruptive the changes will have to be.

While this task has been referred to as the third rail of American politics, it is actually one of the easier public policy problems to resolve.  Minor adjustments to the eligibility age to correspond to increasing life expectancy (and physical vitality) of our citizenry, along with modest hikes in the maximum wage level subject to the payroll tax, would put the program on sound footing for 75 years.  Not so long ago, both of these common-sense adjustments were legislated and implemented without so much as a public murmur.  That, of course, was before the hyper-politicization of American life where short-tempered surliness has soured public discourse of all kind.

So, what else is on the table?  Well, if Republicans succeed in taking over the Senate in 2014 and perhaps the presidency in 2016, the privatization of the Social Security system for those under, say, 55 has a better than fair chance of prevailing.

One prism through which to view any such transformation of the current Social Security system would be to identify who wins and who loses.  This perspective is sometimes more illuminating that just reviewing the itemized provisions of a proposed alternative.

THE LOSERS

1. Families with spouses who do not pay into the program.  Under the current program, a family with a spouse who does not pay into Social Security receives benefits equal to 150 percent of those actually earned by the working spouse.  In other words, they receive half as much again in retirement as an unmarried worker who pays exactly the same amount of Social Security payroll taxes.  Under a “privatized” program, benefits would directly correspond to the amount actually paid into the participant’s own “private” account, so the two households above, everything else being equal, would receive identical benefits.  Thus, the stay-at-home spouse subsidy would be eliminated.

2. Workers who would be in a world of financial hurt if they lived longer than expected.  Currently, the program is designed so that beneficiaries will have paid enough into the program to pay for their benefits until they reach their actuarial life expectancy.  Yet, if they live longer than that they continue to receive benefits throughout their lives.  That’s the insurance element of the program.  Under a “privatized” program, those who outlive their life expectancy run the real risk of burning through their Social Security retirement funds long before they die.

3. Lower earning workers.  Currently, the equation that governs the relationship between how much one pays into and receives back from the Social Security program is weighted in favor of lower earning workers.  In other words, the current program is progressively redistributive by design so that lower earning workers get a better deal than higher earners.  Under a “privatized” program, benefits would directly correspond to the amount one actually pays into his or her own “private” account, so the subsidy to lower earning workers would be eliminated.  Furthermore, lower wage earners, who can’t really afford to risk losing their retirement nest egg in the stock market, will likely earn a lower rate of return on their “private” retirement accounts than the more wealthy, and perhaps even lower than under the current program.

4. Taxpayers or offspring of lower-income elders who run through Social Security retirement funds prematurely.  Currently, all participants pay into the system as insurance against poverty in old age because life’s vicissitudes can leave any one of us in dire financial straits after our work years are over.  Under a “privatized” program, lower-income elders who invest unwisely or unluckily or run through their retirement funds prematurely will need to rely on either taxpayers, private charity, or their offspring to provide them basic support for the rest of their lives.

THE WINNERS

1. Financial planners and Wall Street investors.  Currently, undistributed Social Security funds are invested centrally for the benefit of all present and future participants.  Under a “privatized” program, tens of million workers would be responsible for making investment decisions for their own “private” Social Security retirement accounts for the first time.  This will mean billions of dollars in new revenue from transaction fees and commissions for the financial industry as these workers turn to professional advisers and Wall Street investors for guidance.

2. Well-off workers, especially the upper middle class.  For the current situation, see No. 3 under Losers. Under a “privatized” program, high earning workers would no longer have a portion of their share of contributions redistributed to subsidize lower earning workers, thereby increasing the former’s program benefits.

3. Skillful, lucky investors.  Currently, all program participants benefit from the same rate of return on funds deposited in the Social Security Trust Fund.  Under a “privatized” program, those individuals who are skillful and lucky enough to earn a significantly higher than average rate of return in the stock market without suffering a catastrophic loss of funds somewhere along the way will be better off than under the current system, unless perhaps they also outlive their life expectancy.

4. The offspring or other beneficiaries of low-income elders who die younger than expected and haven’t burned through their “private” accounts.  Currently, when a working spouse dies, his or her stay-at-home retired spouse is still eligible to receive the working spouse’s program benefits until death, at which time the payments stop.  Under a “privatized” program, the balance, if any, in a “private” account could be bequeathed to others as part of the deceased’s estate.

The gist of a “privatized” program appears to be “you’re on your own,” while the current program maintains “we’re all in this together.”

Until retiring in 2011, Michael Richardson was assistant secretary of the Florida Department of Community Affairs under Gov. Charlie Crist. He has also been a committee staff member in the Florida Senate, a policy adviser to Govs. Bob Graham and Bob Martinez, and from 1990 through 2006, a self-employed management consultant to state and loca

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