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Why Does AFSCME Oppose Privatization?

AFSCME opposes dismantling Social Security and using payroll taxes — or a portion of payroll taxes — to fund personal investment accounts. Here are some of the reasons why.

AFSCME opposes dismantling Social Security and using payroll taxes — or a portion of payroll taxes — to fund personal investment accounts. Here are some of the reasons why:

Risk: In private accounts, the individual bears the risk for any downturns in the stock market. Right now, the market is flying high, but imagine if it dropped just as a worker is ready to retire. Workers with no private pension or adequate savings (the majority of workers, in fact) could find themselves without sufficient basic income to avoid poverty. History shows that the stock market can’t rise forever, and once it suffers a steep decline it often takes many years to come back. Stocks did not regain their 1929 highs until 1954 and it took almost 10 years for the market to match its 1973 high point.

Remember the three-legged stool? Of the three legs, Social Security is clearly the most risk-free and personal investments the most risky. It makes no sense at all to introduce risk into a system that’s designed to protect us from it.

Large Fees: Because nearly all Americans participate in the same public system, Social Security’s administrative costs are remarkably low: less than 1 percent of benefits paid. This compares to the 12 to 14 percent cited by the American Council of Life Insurance for fees in private plans.

Chile’s privatized national pension system is often touted as a model for Social Security privatization. But administrative fees for private Chilean accounts are a huge 17 to 20 percent. Similarly, if the private accounts plan favored by Wall Street were in effect today, estimates show it would cost Americans $240 billion in investment-management fees in the next decade. This would reduce the rate of return in beneficiaries’ accounts by a full percentage point.

Favors High Earners: The benefit formula for Social Security is weighted to help lower-wage workers avoid retirement poverty. With private accounts, however, their benefits would depend on the success of their investment choices. Lower-wage workers usually don’t have much money left over after paying for necessities, so they tend to be inexperienced investors; and because they can’t afford to risk the few dollars they have, they tend to be cautious investors as well — a habit that often leads to small returns.

On the other hand, higher-income workers would have more money in their accounts to invest and could afford to take bigger risks, which could bring bigger payoffs down the road. That’s why a privatized system tends to favor high earners. Low- and moderate-income workers fare better under a system of guaranteed benefits that are paid every month, no matter how long the recipient lives.

Weak Disability and Survivor Coverage: Picture a young worker who dies or becomes seriously disabled and still must provide for children. Today, that worker would qualify for Social Security family benefits — tapping into disability coverage that’s the equivalent of a $234,000 insurance policy and survivor coverage equal to a $347,000 policy. But what if the same worker had to rely on a personal investment account and had had little time in the workforce in which to accumulate significant assets? Lack of reliable insurance protection is a serious drawback of private accounts schemes.

Big Transition Costs: This is the “dirty little secret” that privatizers don’t like to talk about: the huge costs of converting even part of Social Security to private accounts. Remember that Social Security is a pay-as-you-go system in which today’s benefits are covered by the payroll taxes of today’s workers. So, conversion to private accounts would mean workers would have to pay twice — once to keep the current system going for retirees and soon-to-be-retirees and again to fund the new system for their own retirement.

One privatization plan would increase the federal debt by an estimated $2 trillion. Factoring in costs like that considerably reduce the rate of return projected for private accounts. In fact, the return on investment would likely fall below projected inflation rates and below the level of benefits that the current system would provide.

Benefits Cuts: Privatization is not a solution to Social Security’s problem. In fact, it makes the problem worse. Every percentage point of the Social Security payroll tax that’s diverted to private accounts would reduce revenue to the current system and enlarge Social Security’s future shortfall. As a result, all privatization plans must either increase the federal debt, raise taxes or make big cuts in current benefits that go far beyond what’s needed to correct the system’s 25 percent shortfall. Privatization plans already proposed include such cutbacks as raising the benefit eligibility age to 70 and reducing basic benefits by as much as 30-40 percent. 

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