Argument: Costly privatization of Soc Sec would dampen econ growth

Issue Report: Privatizing social security


Greg Anrig and Bernard Wasow. “Twelve reasons why privatizing social security is a bad idea.” The Century Foundation.: “Reason #3: creating private accounts could dampen economic growth, which would further weaken social security’s future finances. Privatizing Social Security will increase federal deficits and debt significantly while increasing the likelihood that national savings will decline—all of which could reduce long-term economic growth and the size of the economic pie available to pay for the retirement of the baby-boom generation. An analysis by the Center on Budget and Policy Priorities shows that the president’s proposal would add $1 trillion in new federal debt in its first decade of implementation, $3.5 trillion in the following decade, and trillions more thereafter.

The 2004 Economic Report of the President included an analysis of the fiscal impact over time of the most commonly discussed privatization proposal by the president’s commission.3 It found that the federal budget deficit would be more than 1 percent of gross domestic product (GDP) higher every year for roughly two decades, with the highest increase being 1.6 percent of GDP in 2022. The national debt levels would be increased by an amount equal to 23.6 percent of GDP in 2036. That means that, thirty-two years from now, the debt burden for every man, woman, and child would be $32,000 higher because of privatization.

One impact of such increases in federal deficits and debts as a result of privatization is that they are likely to raise interest rates substantially, increasing the cost to the average household of mortgages, car loans, student loans, credit cards, and so on. As a result, the economy would be likely to grow more slowly than it would otherwise. Creating private accounts with increased federal borrowing at first blush would seem unlikely to affect national savings, because additional savings in the new accounts would offset any new government borrowing to pay for those accounts. Economists believe that increased national savings,
especially in a country with savings levels as low as they are in the United States, can increase growth by keeping interest rates low and financing investments in productive activities.

But privatization is actually more likely to reduce than increase national savings. Diamond and Orszag point out that evaluating the overall effect on national savings requires taking into account the likely responses of government, employers, and households. Historically, neither the government nor businesses have changed their spending levels consistently in response to large changes in deficit levels. But households that consider the new accounts to constitute meaningful increases in their retirement wealth might well reduce their other saving. Diamond and Orszag argue, ‘If anything, our impression is that diverting
a portion of the current Social Security surplus into individual accounts could reduce national saving.’ That, in turn, would further weaken economic growth and our capacity to pay for the retirement of the baby boomers.”

Eliot Spitzer. “Can we finally kill this terrible idea?” Slate. February 4th, 2009: “Supporters of privatization also use the backdrop of impending Social Security bankruptcy as an argument for privatization. That, too, is a canard. Wherever one comes out on the urgency of Social Security’s financing problem—and there is fair debate about it—privatization would undoubtedly make the problem worse, not better. Social Security is, as we all know, a Ponzi scheme that would make Bernie Madoff proud. Today’s contributions by workers pay for today’s payouts to recipients, with some being saved in a trust fund that, given changing demographics, will be exhausted several decades from now. If we were to create private accounts for current contributions, invest those accounts in the market, and thus withhold those dollars from the system for current payouts, the shock to the system would be enormous. Where would the money come from to pay current recipients? We would incur a “transition cost” to privatization, as it is politely called, in the trillions of dollars—money that would have to be borrowed in the market to cover the lost cash flow into the Social Security system.”