Would Privatized Social Security Pay More?

According to Stanley Logue, a defense-industry analyst who retired in 1994, the answer to that question for him would be a resounding 'NO'. Mr. Logue spent 45 years paying into the Social Security system and decided to calculate how much money he would have made had that money been invested in the Dow Jones Industrial Average (including dividends). His calculation showed that he made a small amount more in the Social Security system than he would have in the stock market--$261,372 versus $255,499, a difference of $5,873.

From the CSMonitor--

It's an astonishing finding. The DJIA represents blue-chip stocks. Social Security invests in US Treasury bonds. Over long periods of time, stocks have consistently outperformed bonds. So, you would think that Logue's theoretical stock investments from 1950 to 1994 would have surely outpaced the return on government bonds.

The fact that they didn't illustrates one of the hard truths about stock investing: Timing matters.

Mr. Logue missed much of the post-WWII boom in the stock market and retired prior to the bull market in the mid-1990s. This meant that he missed two of the most substantial gaining periods in the last fifty years. Although he did earn well during the mini-boom in the 1980s, much of that gain would have been lost in the market correction at the end of the decade. TIMING MATTERS--so don't let the Republican party convince you that privatization is all good. There are positives to privatization, but there are just as many negatives. The strength of the Social Security administration has been that it serves as retirement insurance and should be treated differently than a retirement investment.

Additionally, Paul Krugman has taken a respite from his sabbatical to write some columns in the NYTimes addressing the issue of the privatization of Social Security. He argues that Conservatives have made such an issue of privatization that we are all expected to believe by now that everything the government does leads to waste while all privatization saves money. With Social Security, Krugman argues that the opposite is true.

In looking at the two most notable examples of privatized national retirement plans--Chile and Britain--that the Conservatives repeatedly cite as positive examples, Krugman argues that the administrative costs of the investments are twenty times that of the current U.S. Social Security system. Krugman also points out that the plan in Chile for privatization was to reduce the national monetary burden, but in reality the national government has saved little over the last twenty-year period because too many retirees had not made enough money on their investments to provide a living that would be above the poverty level. As a result, the government was forced to provide additional funds to provide living expenses for these retirees.

Currently in England, a similar situation is occuring. The Brits privatized their retirement system during Margaret Thatcher's administration in the early 1980s. The Pensions Commission has recently announced that it expects quite a few retirees to have lost money through the privatized system, and the government should expect to spend additional monies over the next several years to keep those people out of poverty. Take the time to read these two Krugman articles--'Inventing a Crisis' and 'Buying into Failure'.