Suggested
Title: An Apology for Social Security Privatization
Everyone
with whom I have discussed Social Security (SS) “privatization” lately has questions,
doubts and concerns: a) how it might affect current SS annuities, b) whether
the investments are insured, c) its effect on the stock market, and d) “cost.” Politicians and political parties have not
helped; Republicans have poorly explained the proposed changes and Democrats
have criticized a straw man.
I have
three goals: (1) To explain what “privatization”
implies, as best one can determine before a draft of the actual legislation is
released. (2) To assure young workers that
privatization would be a good thing for them.
(3) To provide enough facts that motivated citizens will be able to
evaluate SS proposals.
Let me
start by pointing out that no plan of which I am aware would change the
promised SS annuities of those who are already retired nor
of those who are near retirement. When
new plans are announced, however, we need to be watchful.
Now to the private investment portion of a modified SS system.
Privatization,
as explained by Congressman Charles Taylor, is a variation on a proven
investment program already in place for Federal Government workers for 18 years,
the highly successful Thrift Savings Plan (TSP) in which my wife and I chose to
participate while Federal Government employees.
Briefly,
“The TSP is a retirement
savings and investment plan for Federal employees. Congress
established the TSP in the Federal Employees' Retirement System Act of
1986. The purpose of the TSP is to provide retirement income. The
TSP offers Federal employees the same type of savings and tax benefits
that many private corporations offer their employees under ‘401(k)’
plans.” The TSP combines with a small
government annuity and with Social Security (!) to provide the retirement
income for many current Federal workers.
Additional information is available on the government’s TSP website, www.tsp.gov/features/index.html.
My wife and
I invested up to 5% of our pre-tax income in any one of three investment
funds. Presently, Federal workers can invest
up to 14% in any combination of five investment fund(s). These include the Government Securities
Investment (G) Fund,
the Fixed Income Index Investment (F) Fund, the Common Stock Index Investment (C) Fund, the Small
Capitalization Stock Index Investment (S) Fund, and the
International Stock Index Investment (I) Fund. As documented on the TSP website, annual
return on the TSP funds has ranged from 4.3% to 11% per year over the last 10
years, much better than SS! Investing in
particular stocks or bonds is not a TSP- offered option, nor have I heard of
any privatization plan offering that.
And what about risk? This very popular
plan has grown from its inception. To
be sure, the valuation of my C Fund shares, indexed as they are to the S&P
500 Index, has gone up and down since I invested. If I had been more conservative, I could
have chosen to invest some or all of my money in Government securities. That fund has earned money regularly, has
not had the ups and downs of the C fund, but has returned less than the C fund
over time. For more details, see http://www.tsp.gov/rates/monthly-history.html.
Probably
most important, like a 401(k) plan, the money my wife and I invested in TSP belongs
to us, not the Government. Right
now, it sits in our chosen fund(s), growing.
As Federal retirees, we could withdraw any or all of our investment
shares at any time. The ownership
portion of the plan is very important for young workers. Having made their investments in some
combination of these funds, young workers can expect to earn much more with
those privatized dollars than with the rest of their SS “investment,” based the
18-year history of the TSP.
Certainly there
are trade-offs in this business. The
more that can be individually invested, the better the plan is for younger
workers. The more that younger workers
individually invest, the fewer the dollars available for funding existing
retirement annuities. The “cost” of
transition to privatization will be trumpeted by opponents; the “cost” of not
privatizing is rarely discussed, even though it is just as real! We’ve been borrowing from Peter to pay Paul
for many years now, and there’s no free lunch!
There is no “lock box” filled with the SS “Trust Fund.” The lock box contains only IOU’s. Some day, all of this borrowing will catch
up with us.
When new
plans are proposed this year, check them for a) choices of percentage to be
invested, b) choices of funds, c) changes in the payouts for older workers who
don’t choose to invest. Look back at the
history of the TSP and be assured that the investment portion of whatever plan
is proposed will probably work well.
George E.
Keller, Vice-Chair of the