Privatization of Social Security, Annotated Bibliography Example

Introduction

America’s social safety net, even before the prolonged economic downturn of 2008-2010, came under severe scrutiny in recent times.  Indeed, although Social Security and Medicare have proven successful in providing economic stability for retirees, the stability has come at a steep price: Both entitlement programs are on fiscally tenuous ground over the long-term as costs associated with the programs outstrip revenues (GAO, 2); this trend is projected to intensify as the baby boomers, one of the largest cohorts in US history, begin to retire in 2011.

Social Security, however, has arguably played a larger role as a social insurance mechanism that accounts for a majority of income among retired individuals.  With the long-term solvency of Social Security in question, however, numerous policy reform packages have emerged to ensure the program remains for generations to come. Foremost among these recommendations is privatization of Social Security: a reform that would allow individuals to keep money that would have previously gone to the government, in order to invest it individually. While there are policymakers in favor and opposed to the privatization of social security, a number of questions need to be examined before the policy can be assessed. How could the privatization of Social Security help to solve the impending lack of funding for the program? What are the advantages of privatizing Social Security verses the way the program operates now? What are the inherent risks of privatization, and will they outweigh the benefits in the long run?

This paper will first examine the question of what privatization of Social Security would do the current program and recipients. Secondly, the paper will examine advantages and disadvantages associated with these changes as a comparative framework to understand the short-term and long-term implications of a policy change.

Dattalo, Patrick. “Borrowing to Save: A Critique of Recent Proposals to Partially Privatize Social Security.” Social Work 52.3 (2007): 233-242. Academic Search Complete. EBSCO. Web. 24 July 2011.

Patrick Dattalo’sarticle examines ways to “save” Social Security, even though the reforms needed to accomplish the goal may fundamentally change how the program functions.  Indeed, Dattalo notes that Social Security is one of the government’s most successful programs, particularly for the elderly: Poverty rates among the elderly have dropped roughly two-thirds since 1959; more than two-thirds of US elderly get at least half of their income from Social Security.  In spite of the program’s successes, however, it faces an uncertain financial future: Some analysts estimate that the Social Security fund may be insolvent by the year 2044.

While Dattalo outlines a number of policies that may “save” Social Security; he chooses to analyze personal saving accounts (PSAs) due to its generally positive reception among policy analysts and government bureaucrats alike. A PSA essentially allows individuals to take a portion of their payroll taxes (that would have gone to an individual’s Social Security account) to invest in individual private savings accounts.  Although advocates admit the program might exacerbate the program’s fiscal health over the short-run as individuals shift taxes (government revenue) out of Social Security accounts,they posit that savings will accrue over the long-term. Datallaoalso surveys the existing literature on PSAs to create a typology regarding existing scholarly views on the topic.  There are three main views on PSAs among scholars: 1) PSAs are a politically feasible and economically feasible way to set aside additional resources to meet future retirement needs; 2) PSAs are a politically feasible way to cut Social Security benefits so as to limit the share of the nation’s resources consumed by elderly individuals; 3) PSAs are a first-step towards total privatization of the social insurance system.

After assessing arguments on both sides, Datallo concludes that PSAs might actually present more problems than they solve- particularly over the long-term. The main reason is that PSAs differ from the current social security system in important areas such as ownership rights, vesting privileges, and long-term stability of investments. He instead advocates a number of “piecemeal” proposals to cut government outlays related to Social Security including raising the payroll tax ceiling, raising the normal retirement age, and expanding the range of allowable trust fund investments. He ends the article with admonitions for social workers to pay greater attention to developments in social security.Datallo’s work serves as an important resource for my research: His negative, albeit measured, assessment of Social Security provides compelling arguments about why the program should not be privatized.  Datallo also gives a robust review of the existing literature, and bases his conclusions on evidenced opinions from a wide-range of authorities including the World Bank and the Government Accounting Office.  The critique’s main weakness lies in two areas: 1) The author only provides piecemeal reforms at the end that would not likely save Social Security from its putative fate; 2) The analysis is skewed towards examining potential welfare effects on individuals rather than looking at arguments of economic efficiency. Some of these arguments are not the author’s fault: As a professor of social work, his focus is not necessarily on orthodox economic recommendations.  Overall, this piece serves a good foundation to understand arguments in favor and against privatization of Social Security.

Weller, Christian E. “Social Security Privatization and Market Risk.” Review of Policy Research 23.2 (2006): 531-547. Academic Search Complete. EBSCO. Web. 24 July 2011.

Weller, in comparison to the previous article, provides a more specific analysis assessing the linkage between social security privatization and market risk. Indeed, although many analysts are enthusiastic over the privatization of social security as individuals would have more autonomy in deciding where retirement funds are allocated, Weller finds that autonomy comes with a price: Individuals who invest a majority of savings in the stock market are exposed to “market risk”, a rather complex concept that encompasses the potential (capital) losses involved in investing.  Weller examines the concept of market risk in conjunction with three different issues: 1)
Market risk and retirement savings; 2) Market risk and potential fiscal burden; 3) Market risk and labor market. Market risk plays an important role in assessing how much money must be set aside for retirement: Weller analyzes the real return on stocks over a typical working life (35 years) and finds that returns range from 3%-10%. The large variance in returns translates in a wide range of estimates needed for retirement- retirees could end up with a smaller nest egg than originally expected but due to a downturn in the stock market. If this scenario were to manifest, market risk would need to be mitigated, primarily through government fiscal support. Indeed, the British government “bailed out” pensioners after privatization efforts resulted in a substantial loss of retirement income. Pensioners also might attempt to make up the potential shortfall through working longer and saving: There is a “non-virtuous” circle, however, between stock market returns and the condition of the labor market.

That is, individuals who want to work due to a downturn in the stock market may not be able t6o find work as there is a high correlation between a bear market and a poor labor market. Thus, while there are a number of ways to potentially mitigate “market risk” and its deleterious impact on retirement funds, the government would be the lender of the last resort: the same position the government is in as the only guarantor of Social Security’s solvency.

Weller, a left-leaning scholar at the Center for the American Way, provides a compelling argument for inherent risks associated with PSAs not typically addressed.  In many ways, Weller’s analysis was prescient: Although the article was written in 2006, his analysis aptly describes the current situation of many baby boomers that lost a large amount of wealth as a result of the 2008-2009 stock market downturn. The article also posits a key tradeoff in understanding the ultimate argument for privatization: Although continuing Social Security in its current form might result in the need for a government bailout, a switch to PSAs would not obviate the need for such a bailout.  Thus, proponents of private accounts would need a series of policy solutions, including the government acting as a backstop, in order to pass the policy recommendations. The main strength of Weller’s argument lies in the use of economic analysis to question the ultimate feasibility of a PSA system.  The weaknesses of the article are in his inability or unwillingness to address several potential solutions to the problem of market risk.

Svihula, Judie, and Carroll L. Estes. “Social Security Privatization: An Ideologically Structured Movement.” Journal of Sociology & Social Welfare 35.1 (2008): 75-104. Academic Search Complete. EBSCO. Web. 24 July 2011.

Svihula and Caroll provide a different perspective in the Social Security privatization debate examining how support for Social Securityis a function of differing and competing “ideological” movements in society. Indeed, the two authors use historical and sociological methods in order to chronicle how the consensus for the social insurance program originated in the post-Depression milieu and was furthered by sympathetic advisory board and councils. The post-war consensus for Social Security held together from 1950-1994 via an ideologically aligned movement as a key element supporting the nation’s social safety net.

Changes in the social milieu beginning in the 1980s, however, chipped away at the prevailing consensus and opened the path for alternatives to Social Security.  The main catalyst for change was a backlash against the perceived “failed” Keynesian policies of the 1970s that impugned the government’s ability to provide stability in a time of instability and the ultimate cost of that support to the taxpayer. The “private markets” movement codified around the Reagan and Thatcherite revolutions of the 1980s; this development shifted the ideological terrain and terms of debate regarding the nature of Social Security.  The rise of “privatizing” Social Security swept Washington DC and the world as countries such as Chile decided to privatize its pension system.  Republican governments of the time seized on the change in sentiment to form new working groups that questioned the long-term viability of Social Security and proposed private options to deal with the upcoming crisis. In recent times, the pendulum has once again swung back due to macro and micro concerns over implementing the privatization project: Not only have countries who implemented the plan encountered stagnant growth and investment returns but there is also concern over shifting risk to individuals, many who may not be financially literate.

This essay, written by two reputable sociologists, provides a valuable perspective in understanding how changes in the social milieu and political system lead to changes in policy.  Indeed, whereas the previous two papers primarily dealt with economic analysis of privatization. the authors showed how policies are supported by stakeholders and unified by ideological movements.  Thus, the move towards privatization should not only be judged on the merits of the policy arguments, but should also account for how those arguments arose in the first place.  The additional historical and political context of the article will also help in understanding the background of the issue.  The article did also have some weaknesses.  The lack of economic arguments, and interpretation of economic arguments, hurt some of the authors’ interpretations.  In addition, the article could have provided a more balanced account regarding which policymakers supported and opposed the changes in Social Security; while there were inevitably more Republicans in the former camp than the latter, this piece seemed to grind an ideological axe along with its analysis.