What If We'd Already Privatized Social Security?

September 17, 2002

In an article in the American Prospect, Robert S. McIntyre offers the misleading argument, shared by opponents of personal accounts, that recent stock market declines show the folly behind market investment for Social Security:

"Let's see what would have happened if we'd accepted Bush's theory whole hog and moved the entire Social Security Trust Fund into the stock market. At the end of 1999, Social Security had accumulated $893 billion in its Trust Fund. Since then, payroll taxes have exceeded benefits by $234 billion and the fund has earned $182 billion in interest. That combination brought the fund's total value to $1.3 trillion by mid-August of this year."

"That's what really occurred. But suppose instead that starting on Jan. 1, 2000, we'd taken the entire Trust Fund, along with all subsequent surpluses, out of those stodgy 6.6 percent annual interest government bonds and dumped every penny into a plain vanilla Standard & Poor's 500 index fund. Where would we be today?

"Well, despite the big excess of taxes over benefits, by mid-August the value of a privatized Trust Fund would have actually fallen -- to only $776 billion. Compared with earning 6.6 percent interest, Social Security would have lost a staggering $533 billion, leaving the Trust Fund 41 percent lower than it actually is."

Now, McIntyre's argument may be true over the short run, but retirement saving is about the long run – after all, no one began working one year ago, investing money for retirement, and retired today. Workers would hold their savings for decades, and over the long term the market has been a remarkably stable and high-returning investment.

Reprinted here is a November 2001 article by former Rep. Tim Penny (D-MN), a member of the President's Commission to Strengthen Social Security (and now an independent candidate for governor of Minnesota). Penny examines a far more realistic question: what if we had created personal accounts back in 1983, the last time Social Security was "reformed." The facts show that long-term market investment would strengthen the system, even when the market was in a dip:

"The war against terrorism has vaulted national security to the top of Washington's policy agenda, and rightly so. But ensuring the long-term economic security of the American people remains an important concern. That is why the President's Commission to Strengthen Social Security is continuing its work on a bipartisan plan to restore fiscal soundness to the nation's troubled public pension system."

"For the next 15 years Social Security is projected to run annual surpluses. Over the long term, however, the program faces a wide gulf between benefits promised and the revenue available to pay them. The only way to close that gap is by adjusting benefits, raising taxes, or setting aside money in advance to ease the future financial crunch. Saving for the future was supposed to be the purpose of the Social Security Trust Fund. Indeed, in 1983 lawmakers intentionally raised payroll taxes above the level needed to cover benefits, expecting the money to be saved in the Trust Fund."

"Those of us in Congress at the time voted for the change in good faith, believing it to be a reasonable step toward solving Social Security's future financing crisis. But nearly the entire surplus over these ensuing years has been spent - on everything from defense to social programs - in order to mask deficits in the general fund."

"In exchange, the Trust Fund received $1.1 trillion in government bonds (and this includes the annual interest credited to the Trust Fund)."

"Unfortunately, as the Clinton administration's fiscal year 2000 budget pointed out, these Trust Fund bonds 'are claims on the Treasury that, when redeemed, will have to be financed by raising taxes, borrowing from the public, or reducing benefits or other expenditures.' Those are precisely the unpalatable measures the Trust Fund was supposed to avoid."

"Had we known in 1983 what we know today we might have moved to a system of personal retirement accounts, which is the most effective way of ensuring that Social Security surpluses are not diverted to other government programs."

"To understand the benefits of saving now to pay for future Social Security benefits, consider what would have happened if lawmakers in 1983 had allowed workers to invest a portion of their payroll taxes in personal retirement accounts."

"If only Social Security's surpluses had been invested in S&P 500 stock index funds, those accounts today would hold approximately $1.7 trillion in assets, enough to cover promised benefits for many years. That's even after the S&P 500 dropped by 9 percent last year and another 17 percent so far this year."

"Why are personal accounts preferable to the Trust Fund? The key difference is not that equities earn a higher return than government bonds, though over time they always have. It is that personal accounts create an asset that can help finance future benefits, while the Trust Fund creates a debt that must be financed by future taxpayers."

"If Social Security's surpluses had been invested, personal accounts would have added $1.7 trillion to the pool of money available to pay benefits. But because those surpluses were loaned to the rest of the federal government, future taxpayers will have to come up with $1.1 trillion to pay the money back. One approach represents a way of truly saving for the future. The other isn't a form of saving at all because the money is almost invariably used for other purposes."

"The Commission to Strengthen Social Security has been charged with shoring up Social Security's finances, and personal retirement accounts can be part of that solution. Personal accounts would be the ultimate lockbox, putting your Social Security dollars where the government can never touch them."

Wilkes Barre Times Leader, November 20, 2001, "If Workers Invested Social Security In 1983 Our Troubles Would Be Reduced," by Tim Penny

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