While the potential upside is intriguing, privatizing Social Security is ultimately too risky.
By Loretta Sánchez
The subject of privatization, or shifting government projects to the private sector to achieve a more efficient outcome, has been a topic of great interest in the past decade. In many cases this approach has been successful in cutting costs. In other cases, there is far more to consider than the bottom line. Social Security is an example of the latter.
Today, the Social Security system provides cash benefits to 46 million retired and disabled workers, their dependents, and their survivors. Medicare provides an additional 40 million people with health insurance. Because any changes to these programs would have an extraordinary impact on the lives of all Americans, it is critical that we carefully examine proposed reforms.
On its face, privatization of Social Security seems to offer enormous potential benefits. Proponents argue there would be more individual control over investments and contributions, along with the opportunity for increased financial return. Privatization would have the added benefit of boosting the financial industry as workers increasingly turn to individual retirement accounts and brokerages.
Unfortunately, there are three important variables missing from the privatization equation: Some Americans’ lack of the necessary fiscal sophistication for understanding the financial markets; the possibility of an unstable investment market; and a biased rate of return.
Financial sophistication is something many business professionals take for granted. But with nearly 30 percent of Americans having only a high school diploma or less and 44 million Americans reading at first-grade level or below, who will ensure that the public is making sound investments?
Would the government be responsible for subsidizing investment programs devastated by sudden market downturns, such as those recently seen in the science and technology markets? Not only would the flood of disparate investment decisions have the potential to throw off the market, transitions to personal retirement funds run the risk of creating large-scale problems that could disproportionately affect today’s younger workers. That does not even take into account the potential for victimization through fraudulent investor schemes.
As many of us learned over the last few years, the financial markets can be rocky and unstable. Even the most skilled investors have been unable to avoid recent financial losses. If all of the nation’s retirement funds are tied up in investments in a market that becomes unstable for any number of reasons, there is absolutely no guarantee that retirees will really get the best returns on those investments. Worse, they could end up impoverished. Given the current war and global uncertainty, market instability is increasingly likely.
Since current proposals for Social Security privatization are based on a percentage of earned income, those at the bottom rungs of the salary chain would have less to invest and would earn disproportionately low returns. That would create an economic void for our least financially stable citizens.
If the market were to crash or even slip dramatically in certain sectors, we, as a nation, would be left to pick up the tab for healthcare costs and assistance for the aged – a population that is projected to grow 74 percent by 2025. All this at a time when the government would least be able to afford it. We cannot gamble on the future. Now is the time to prepare for financial security.
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