Privatized Social Security: We're buying into failure

From the New York Times via the Houston Chronicle, Princeton economist Paul Krugman explains the largely undiscussed downside to Social Security privatization:

In particular, the public hasn't been let in on two open secrets:

• Privatization dissipates a large fraction of workers' contributions on fees to investment companies.

• It leaves many retirees in poverty.

Decades of conservative marketing have convinced Americans that government programs always create bloated bureaucracies, while the private sector is always lean and efficient. But when it comes to retirement security, the opposite is true. More than 99 percent of Social Security's revenues go toward benefits, and less than 1 percent for overhead. In Chile's system, management fees are around 20 times as high. And that's a typical number for privatized systems.

These fees cut sharply into the returns individuals can expect on their accounts. In Britain, which has had a privatized system since the days of Margaret Thatcher, alarm over the large fees charged by some investment companies eventually led government regulators to impose a "charge cap." Even so, fees continue to take a large bite out of British retirement savings.
A reasonable prediction for the real rate of return on personal accounts in the United States is 4 percent or less. If we introduce a system with British-level management fees, net returns to workers will be reduced by more than a quarter. Add in deep cuts in guaranteed benefits and a big increase in risk, and we're looking at a "reform" that hurts everyone except the investment industry.

Click here for the rest.

And don't let the whole "there is no alternative" meme fool you: when Social Security "goes bankrupt" in twenty or thirty years, it will still be able to pay out 80% of benefits. That is, if the federal government doesn't keep spending like drunken sailors, Social Security is easily repaired. This is a manufactured crisis, fabricated for the sole purpose of delivering billions of dollars into the hands of the Republicans' wealthy supporters. It won't improve things at all; in fact, the reverse is true. Privatization will make things far worse.

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