News, Analysis, and Research for the Retirement Planning Industry The Case Against Privatizing Social Security

In Uncategorized on 2 December 2010 at 11:38 pm

Perhaps it is my Libertarian streak, but I had been supportive of proposals to “privatize” Social Security by allowing workers to direct the investment of their payroll deductions.

In his Fortune column, Allan Sloan makes a compelling case against it. (Here’s the link to the same column in the Washington Post.)

Sloan points out that more than half of married couples over 65 and 72% of singles get more than 50% of their income from Social Security.  “For 20% of 65-and-up couples and 41% of singles, Social Security is 90% or more of their income.  That isn’t projected to change.”

Sloan’s notes the two 50%+ equity market drops in the last decade and makes the point that “retirees shouldn’t have to depend on the market’s vagaries for survival money. “  Just as dangerous to retirees survival money as the market’s vagaries is retirees’ own investment decisions.

DALBAR’s 2009 Quantitative Analysis of Investor Behavior found that investors consistently underperform the market.  As illustrated below, for the 20-year period ending in 2008, investor returns did not even keep up with inflation.

Source:  DALBAR’s 2009 Qualitative Analysis of Investor Behavior (QAIB)

Though I don’t typically embrace such a paternalistic view, I think we have to protect retirees from themselves when it comes to their food money.   And as a practical point, if we privatized Social Security and retirees lost 90% of their Social Security income investing in Russian Internet dating sites, taxpayers would be making up a large portion of those losses through other forms of public assistance and lower GDP (not to mention less intergenerational wealth transfer).

Sloan reminds the reader  “Social Security isn’t supposed to be a gambling program or a wealth-building program.  It’s an intergenerational social insurance program, in which we make sure our parents don’t have to depend on food banks and homeless shelters when they get old, and we hope our kids do the same for us.”

That doesn’t mean the government shouldn’t be encouraging wealth-building.  They should be by changing the tax code so that it rewards investment, or at the very least, raise the IRA and DC plan contribution limits.  But those are topics for another post.


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