[PEN-L:1856] EPI in WaPo

[sawicky@xxxxxxxxxx (Max Sawicky)]

My hero Dean Baker breaks into the Washington
Post op-ed page:


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  A Deal Privatization Can't Beat

  By Dean Baker

  Wednesday, December 23, 1998; Page A23

                  The most common argument for privatizing Social Security
is that workers would enjoy a higher rate of return on their money if they
could invest it in the stock market. Privatizers argue that Social Security
gives workers a low, or even negative, rate of return. They assert that the
stock market, on the other hand, would give workers a 7 percent annual rate
of return even after adjusting for the effect of inflation. These claims
fundamentally  misrepresent the facts by exaggerating privatization's return
and discounting the return Americans receive from Social Security.

                  Privatizers understate Social Security's return because
they base their calculations exclusively on the retirement benefits that
individual workers receive. They ignore the other aspects of the program,
such as disability benefits and survivors' benefits for dependent children
and spouses. Social Security is more than an investment vehicle. It is an
insurance policy against disability, premature death and an impoverished old
age after a lifetime of low earnings. Any insurance company that charged its
customers, on average, a dollar for each dollar in benefits it paid out
would quickly go out of business. In the real world, insurers actually
charge customers approximately $1.18 for each dollar in benefits they pay
out. Any fair comparison of Social Security to the private sector must
include this premium in its calculations.

                  But Social Security is an insurance policy against
something else: inflation. Its retirement payments take the form of a real
valued annuity: a payment that continues as long as the worker (and/or
spouse) lives, and is adjusted for inflation. It is difficult if not
prohibitively expensive to buy in the private market an annuity that is
protected against inflation, and workers typically pay premiums of 15
percent to 20 percent to purchase an annuity that is not indexed to the cost
of living.

                  When you factor in these four insurance features of Social
Security -- its protection against disability, premature death, an
impoverished old age and inflation -- its return increases significantly. No
private substitute can offer nearly as good a financial deal.

                  While the conventional calculations understate the returns
from Social Security, they inflate those of private accounts. The most
important source of exaggeration is the projected returns in the stock
market. Although those returns have averaged 7 percent over the past 75
years, they are unlikely to continue to be that high. The Social Security
Trustees'  projections of slowed economic growth suggest that stock market
returns will range from 3.5 percent to 4 percent during the next 75 years.
It is also important to note that most people will not keep all their money
in stocks all the time. The conventional assumption is that over a worker's
life he or she will invest 50 percent of savings in stocks and 50 percent in
lower-yielding bonds or money-market funds.

                  Next, it is necessary to count the administrative costs.
In privatized retirement systems in Chile and Great Britain, these costs
have run between one percent and 2 percent annually. Finally, one has to
include the taxes needed to finance the transition to a privatized system.
These taxes could be as high as 1.6 percentage points of a worker's wage.
Zero return is paid on transition taxes.

                  When the returns on private accounts are accurately
tallied, they fall below 2 percent and may even dip below one percent.
That's far worse than most workers fare with Social Security. A two-earner
couple, for example, in which the husband's annual wage averages $27,500 and
the wife's wage averages $13,200, will reap a return of 3.2 percent when all
the benefits of the Social Security program are assessed on the basis of
their insurance value.

                  Social Security's benefit structure is progressive, so
that poorer families receive a better return than higher-income families. A
couple in which both spouses earn annual wages averaging $13,200 will get a
return of 3.5 percent, when all the benefits of the Social Security program
are taken into account, while a couple in which one member averages $44,000
and the other averages $27,500 will get a return of 2.4 percent. Still, an
honest and thorough appraisal raises Social Security's rate of return a full
percentage point or more above what any privatization plan can deliver to
most Americans.

                  Social Security will not make anyone rich, but it's been a
good deal for 60 years, and there's no reason it can't be a good deal for
another 60.

The writer is an economist with the Economic Policy Institute.

© Copyright 1998 The Washington Post Company