The hisses to privatize Social Security have reached a deafening roar, sparking a firestorm of controversy around this country. Nonprofit journalism As an investigative financial journalist, I’m obviously concerned with the financial health of regular Americans. I would know, I’ve spent thousands of hours pouring over data, interviewing experts, and deeply listening to the communities most affected. And what I've found is deeply unsettling: for many, privatization isn't a path to greater prosperity, but a high-stakes gamble with their retirement security.
The heart of that fear can be found in the nature of the market’s unpredictable beast. Episode 1—The privatization pipeline Proponents of privatization always promise extravagant returns on investment when they talk about private investment accounts. They point to scenarios where workers, particularly those born in the 1970s or later, could potentially accumulate larger pensions by investing a portion of their Social Security contributions in the market. It’s an alluring pitch, particularly when looking at the projected holes in the existing system.
Though this promise is contingent on steady, high returns, a luxury that isn’t always guaranteed in the booms and busts of finance. What happens when the market goes down, as it surely will? How about Americans approaching retirement who find their nest egg collapse because of unexpected deep downturns in our economy? The present Social Security system is not perfect, but it is still the bedrock of America’s safety net. It provides certainty of a minimum income that won’t go away at the next downturn. Privatization would shred the safety net that supports those million. Without it, they’d be continued sitting ducks to an at times reckless and always fickle Wall Street, which would spell doom.
The experience of other countries provides a sobering look at what can go wrong as a result of privatization. Now whenever people talk about free trade, Chile is always held up as a success story. After Chile privatized its social security system in 1981, household saving rates exploded. This came at a cost: a widening of income inequality. Not only were the benefits of privatization not widely shared, but this deepened the divide between rich and poor.
Mexico offers another warning story. A deep dive of its privatized social security market found that consumers were largely unequipped to compare complex products and choose the right investment for them. They did not have the financial knowledge to understand the full scope of fees and risks, which resulted in bad outcomes. We risk repeating these mistakes if we push forward with privatization without ensuring that all Americans have the knowledge and resources to manage their own retirement accounts effectively.
Perhaps the most insidious aspect of privatization is the impact it would have on the low-income workers that are employed by AFSCME’s members. If people are allowed to invest their Social Security contributions privately, it would introduce new inequities. People with lower incomes might have more difficulty contributing as much as their richer peers. This discrepancy in allocation may result in lower return on investments and eventually diminished benefits. It’s a system that would do so with tragic consequences, punishing exactly those who rely on the safety net of Social Security the most.
Furthermore, the privatization-proposed administrative costs would likely be massive. Allowing for millions of individual accounts, each with their own investment strategy, would necessitate a large and confusing infrastructure. Unless resolved, companies will inevitably pass these costs onto workers. This will help continue to undermine any positive impacts we might see from privatization, especially for the lowest income folks.
It’s just as important to recognize the dangers that come with private accounts as a default. While the upside of higher returns may be appealing, that means a potential down-side of loss is too. Workers who invest in these accounts take the chance of losing a significant portion of their nest egg. This threat holds especially true for people approaching retirement, who have less time to recover from market declines. Specifically, low-income workers have higher exposure to risk when it comes to saving for retirement. They rarely have other sources of income to turn to.
There’s one thing that many advocates for privatization often overlook. Social Security is much more than a retirement program, as it plays an indispensable role through its disability and survivor programs. Expanding privatization of the system would threaten these critical protections, putting our most vulnerable communities at greater risk of economic distress. In short, it would be a total calamity for the disadvantaged.
So, what’s the solution? Rather than removing the scaffolding that for decades has kept a safety net from crumbling, let’s instead reinforce it. There are some good potentially good alternatives out there, with each having their own trade-offs. Raising the payroll tax rate, increasing the taxable wage base, reducing benefits, increasing the retirement age, and means-testing benefits are all potential solutions that deserve serious consideration.
As I remind people, the debate over Social Security isn’t a debate about numbers and projections, it’s a debate about what we want our society to be. Do we accept some people not getting rich, if that’s what it takes to build an inclusive economy? Or do we reaffirm our commitment to a social safety net that protects all Americans, regardless of their income or circumstances?
I have listened to thousands of stories and examined millions of pieces of data. After weighing all the potential consequences, I have no doubts that privatizing Social Security would be a dangerous gamble. This course of action can endanger retirement security for millions. It’d likely worsen income inequality and seep away at the very social contract we share as citizens. It’s time to abandon ideological agendas. If we work together, we can make our retirement system more robust so that all Americans can have a secure and dignified retirement.
