MYTH 1: UNLESS WE DO SOMETHING BOLD, SOON, SOCIAL SECURITY WILL GO BANKRUPT. It is true that the government projects that the Social Security trust funds, now growing by more than $150 billion a year, will be drawn down to zero in 2042. But those same estimates also show that, after 2042, Social Security payroll taxes will be sufficient to finance about 75 percent of the payments that will be owed to the programs beneficiaries. These projections are made using extremely conservative assumptions about economic growth. If our economy continues to perform well, there is likely to be no shortfall at all. Therefore, what we face is a possible shortfall almost four decades in the future, not an immediate crisis or impending collapse. Although the possible shortfall after 2042 is not good news, Social Security has run smoothly with minimal reserves throughout most of its history. In the past, payroll taxes from workers were just enough to cover contemporary payments to beneficiaries. Congress created today.s growing Social Security trust funds, financed by the excess of current payroll taxes over payments, in order to partially pre-fund the system in anticipation of the growing future population of retirees.
MYTH 2: WE CAN DIVERT SOME SOCIAL SECURITY CONTRIBUTIONS TO PRIVATE ACCOUNTS WITHOUT JEOPARDIZING THE SOCIAL SECURITY SYSTEM.
MYTH 3: THE SOCIAL SECURITY SYSTEM WASTES MONEY THAT WILL BE SAVED IF WE INTRODUCE INDIVIDUAL PRIVATE ACCOUNTS. Exactly the opposite is true. The Social Security system costs far less to operate than private investment funds. Public opinion polls by Roper show that the public guesses the administrative costs of Social Security as a percentage of benefits to be more than 50 percent. In fact, administrative costs for Social Security are less than 1 percent of benefits, compared with average administrative costs of 12 to14 percent for private insurers. Administering millions of small accounts would consume a large fraction of revenues, especially if investors are permitted actively to manage their accounts. To these costs must be added the marketing costs incurred by private funds as they compete for worker.s accounts. Net returns on private accounts are reduced by the costs of management fees, account administration, and marketing. Economist Peter Diamond has shown that the administrative costs in countries that have set up individual accounts (Britain, Chile, Argentina, Mexico) reduce benefits by 20 to 30 percent compared to what the U.S. Social Security system would pay given the same resources.
MYTH 4: SMALL PRIVATE ACCOUNTS WILL GET A MUCH BETTER RATE OFF RETURN THAN THE SOCIAL SECURITY TRUST FUNDS.
MYTH 5: WELL MANAGED PRIVATE ACCOUNTS NEED NOT BE RISKY. All private investing is risky. If a person had acquired a broad index of stocks over his working life, retired and sold these stocks on October 18, 1987, he would have realized 18 percent less income per year in retirement than the person who had behaved exactly the same in every respect, except that he exited the market one day earlier.
MYTH 6: PRIVATIZATION WOULD MAKE ALMOST EVERYONE BETTER OFF AFTER SEVENTY-FIVE YEARS. It is true that .pre-funding..putting resources aside today to earn returns until we retire.could make almost everyone better off after 75 years. But between now and then, we would feel the squeeze from saving for future retirement. What is more, prefunding is not the same thing as privatization. We could pre-fund future retirement through the Social Security trust funds instead of through individual accounts. The result in either case would be higher saving today and more secure claims by future retirees on the future economic pie.
MYTH 7: PRIVATE ACCOUNTS GIVE THE AVERAGE HOUSEHOLD A CHANCE T GET RICH. A system of private accounts would shift risk from the government to retirees. But it would not offer opportunities to get rich. There would not be many investment decisions left to workers in a privatized system. The investment options offered to individual investors would have to be strictly limited, for two reasons: First, in order to control administrative costs, the number of investment options for each account would have to be very few. Second, in order to prevent workers from losing their retirement funds, most high-risk and novel investments would have to be ruled out.
Such paternalistic measures are necessary unless we are willing to let people who mismanage their retirement accounts die hungry and cold.
MYTH 8: FOR MOST RETIREES, SOCIAL SECURITY BENEFITS ARE A WELCOME BUT NOT AN ESSENTIAL SOURCE OFF INCOME. Without Social Security, which in January 2004 provided households an average benefit of $863 a month (around $10,000 a year), about half the elderly in America would fall below the poverty line.
MYTH 9: AFRICAN AMERICANS HAVE ESPECIALLY MUCH TO GAIN FROM PRIVATIZATION. This argument is based on the fact that African Americans have shorter life expectancy than whites and therefore collect retirement benefits for fewer years, on average. But African Americans also have lower average earnings than whites. Because Social Security.s retirement benefits replace a larger share of past earnings for low-income versus high-income beneficiaries, African Americans receive a higher annual payoff in comparison to their past tax contributions than whites. African Americans also own fewer assets, and have less extensive pension coverage than whites, so they are more likely to be highly dependent on Social Security benefits. Moreover, the flip side of African Americans. shorter enjoyment of retirement benefits is their greater dependence on the life insurance and disability features of Social Security. African Americans constitute 12 percent of the U.S. population, but 25 percent of the children receiving deceased worker benefits in 1996, and 18 percent of the workers receiving disability benefits.
The claim that African Americans have especially much to gain from privatization overlooks a further feature of privatization proposals: annuitization. Every serious proposal to replace part of Social Security with private accounts includes limits on the way individuals may dispose of their retirement nest egg. To prevent a retiree from mismanaging the nest egg, jeopardizing his or her family, every retiree must obtain an annuity upon retirement, converting the nest egg to an income stream over the rest of the expected life. This process would create a system that is very similar to the present system, from the worker.s point of view. The retiree would receive an income until death, at which time survivors would receive support. There would be no additional bequest from the privatized retirement account.
MYTH 10: PRIVATIZATION IS EQUALLY GOOD FOR HIGH-INCOME AND LOW-INCOME WORKERS.
MYTH 11: PRIVATIZATION IS EQUALLY GOOD FOR WOMEN AND FOR MEN. Privatization would penalize women because they earn less, live longer, and interrupt their working careers more frequently than men.
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