One of the biggest news items in America today is Social Security and the desire of President Bush to drastically change the program, privatizing it as much as possible. Supporters say that he wants to reform the system in order to make it more efficient and profitable. Detractors say that he wants to undermine the most successful progressive social program of the 20th century.

Publius explains what the basic economic problem with the proposal is:

If today’s workers divert money to the stock market, that money would no longer be available to pay Grandma. Let’s say I pay Grandma $100 a month. If I take a third of that and invest it, there would only be $67 left for Grandma. The problem, though, is that I have promised Grandma that I would pay her $100 for the rest of her life. Because I diverted some of that money, a gap is created. I no longer have the money to pay her what I promised her. I’m $33 short. The “gap” is the most overriding problem that Bush faces in creating private accounts.

Bush is attacking the gap in two different ways. First, for people over 55, he is going to close the gap by borrowing money. He is not going to do it by cutting benefits. Second, for people under 55, he’s going to “promise less.” In other words, he’s going to cut benefits for people under 55. That’s what the whole price-indexing suggestion was about in the SOTU.

Hopefully, you can begin to see why this such a political nightmare. First, given what you now know, you can understand why private accounts have nothing to do with SS’s solvency. Removing that much money threatens its solvency. That’s because the Bush plan isn’t really about – and has never been about – saving Social Security, it’s about downgrading it. It’s about making it less important, and quite possibly phasing it out altogether. You can, of course, have a good faith argument about whether this is good policy, but it is a lie to say that this policy is about protecting its solvency. Second, Bush’s proposal creates massive deficits – massive massive massive massive. Massive. Third, it cuts benefits for everyone under 55, which probably doesn’t poll well in the 40-to-54 age group. There’s a little something for everyone to hate. It’s a truly terrible proposal, and I would be somewhere between skeptical and terrified if I were a congressional Republican.

Elizabeth Anderson explains the crucial fact that Social Security is basically a social insurance program, not a retirement program. Moving funds from insurance to retirement investments is, therefore, predictably problematic. Would you move funds from life insurance to stock investments? From home insurance to land investments?

The purpose of Social Security is to insure against a whole battery of risks that are difficult or expensive for many people to insure on the private market, especially if they have modest means or lack financial sophistication.  Some of these risks are inherent in strategies that rely exclusively on private sources for retirement (IRA's, 401(k) plans, corporate pensions, etc.).  What are the risks Social Security shields us from?

Let's count them up:

1. The risk that you will outlive your retirement savings. 2. The risk that inflation will eat away at the real value of the income derived from your retirement savings.
3. The risk that your private investments will go sour.
4. The risk that your lifetime income will be too low to accumulate enough savings to avoid poverty in retirement.
5. The risk that you will lose your prospects for a decent retirement due to personal bankruptcy. (Some private retirement accounts, particularly those available to the self-employed, are not protected from bankruptcy proceedings).
6. The rapidly increasing risk that your post-retirement standard of living will plunge precipitously because your employer ran your pension plan into the ground. (Although there is an independent federal program that takes over bankrupt corporate pension funds, it offers a far lower payback than promised by these plans, making additional guaranteed sources of income more important for retirement security).
7. The risk that you will become permanently disabled during your working years, leaving you and your family without your income, and hence also without retirement income, given your inability to save up for old age.  (Workers' comp only covers disability due to work-related causes, and ends upon reaching retirement age.)
8. The risk that you will die, leaving your spouse and dependents without support from your income.

It's a trivial exercise to show that, if nothing goes wrong, you'll be better off never having paid for insurance than having paid for it. ... A true comparison of Social Security with privatization would compare Social Security benefits with the package of retirement + multiple types of insurance that you could get on the market.  The comparison would not be easy, however, because some of the types of benefit provided as a matter of course by Social Security are very hard for many workers to match in the private sector. ... A few years ago, Dean Baker (now at the Center for Economic and Policy Research) calculated the insurance value of Social Security and found that it compared favorably to what low- and medium-income workers would be able to get in the private sector, even if the Social Security Trustees are right in their gloomy predictions for Social Security a few decades from now.

You can't replace insurance with investment — they are two completely different animals. You can invest in ways that might reduce the need for insurance, but only the very wealthy can have so many investments that the need for insurance would be obviated. This is especially true if one considers the fact that the investments with the highest returns are also the riskiest — hardly sound replacements for insurance.

Publius explains why it's important to remember that Social Security is a form of insurance:

Because Social Security is essentially an insurance program (for retirement, death, and disability), it’s important to understand some general principles of insurance. Insurance is about shifting risk. More specifically, you buy insurance in order to shift the risk of some potential event to someone besides you. ... It’s better for insurers to have this risk because they can more efficiently spread it to a large group. For example, let’s say that 10 people have car insurance and only one gets into an accident that costs $100. Having everyone pay $10 (and free themselves of risk) is better than everyone keeping risk and only one person paying $100.

Social Security works the same way. The government assumes the risk, and spreads the costs to a large group (the American public). If there were no Social Security, we would all bear the risk of losing our savings and having nothing in old age. We don’t like that risk, so we pay taxes to shift it to the government. But in a world of private accounts, we would again bear more risk than before. If the economy plunged, or our investment collapsed, or whatever else might happen, the risk is ours. We are screwed unless the government decides to bail us out – which of course would defeat the whole purpose of partial privitization in the first place.

People who have the ability should invest in ways that make Social Security unnecessary — just like people who have the ability should do things to their home to make fire insurance unnecessary. That doesn't mean, though, that it's smart for them to therefore not pay for insurance. Regardless of the specific issue, insurance is one of those things that people should have and pay for even while hoping that they will never actually need. This is obvious when it comes to car insurance or home insurance, but the same attitude should hold when it comes to Social Security as well.

Trying to change Social Security from a form of insurance to a form of retirement investment necessarily means shifting all of the various risks being insured against away from the large groups/government and onto the shoulders of individuals. This is what Bush's rhetoric of "ownership" entails: getting people to "own" the risk that they won't be able to retire above the poverty line.

Read More:

• Guide to Ethics and Morality
• News About Ethics