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Will privatizing the Social Security program
as proposed by President Bush be economically beneficial?
Can privatization maintain benefits and employment taxes?

Table of Contents

Introduction	2
The Idea of Privatization	3
Examination and Evaluation	5
Control Risk	5
Mathematical Accuarcy	6
Substantiation	7
Mathematical Accuracy : Argument's Validity	8
Unstated Assumptions	11
Additional Conclusions Can Be Drawn	12
Substantitation: Facts and Findings	12
Substantiation of Assumptions by facts	14
Conclusion	18
Comments	20
Footnotes	24

Download Underlying Financial Data (Excel 97-2000 format)

Introduction

In 1934 the "Social Security Act" was enacted as a transfer-payment program that allowed covered workers to receive benefits according to their level of participation. Enrollment to this unique transfer program began in 1936, and was quickly considered to be a success. In 1940 Congress expanded the coverage of employed workers, a trend that continued until 1965 when the Medicare program was introduced, gaining popularity among employees and employers alike⁽¹⁾.

The Social Security program was enacted as a supplementary benefit for retired employees. It was not intended to be a whole retirement program; further, it is based on a fund-transfer structure. In a fund-transfer program, employees who are currently receiving benefits from the fund are able to do so because other employees continue to contribute to the fund. There is not a personal-account in the program as is there is in an Individual Retirement Account (IRA) or other pre-tax retirement accounts.

In the past decade, the debate on the future of the fund became heated: many critics of the program and its administration have argued that the system is flawed and should be changed. In particular, the critics said, it should become a privatized system where funds are invested in an open market. Although the argument for privatization of the Social Security program are numerous, this paper examines and critiques only one such proposal. The proposal set forth by President George W. Bush was picked for this examination because, as a vocal critic of the Social Security program, and as President of the United States, President Bush is in a position to make changes that many have said are needed. Bush's proposal⁽²⁾ is one argument among many for the need for privatization of the Social Security program. This paper intends to examine the substance of the Bush proposal and evaluate its validity; through the process of examination and evaluation, the paper hopes to make concise and clear some of the issues that are now facing the Social Security program.

The Idea of Privatization

Overall, the issue of privatizing a retirement fund, in whatever scope and capacity, touches on the role of Government in redistributing funds, or its attempt to divorce itself from its current role of 'fund manager'. The U.S. government is now seen by many as an all-around provider of a their retirement. This notion goes to the issue of personal responsibility vis-a-vis reducing the intervention of the government in personal life. Although, strictly defined, the role of the goverment is not within the scope of financial theory, this aspect shapes the future of any implementation of the privatization of the Social Security fund.

Similarly, the issue is of administration of any changes to the Social Security program has significant financial consequences. Because any change in the financial landscape, simply by the mere order of magnitude of the actual dollars managed in the Social Security fund, has side effects for the economy. Further, if a change in the management of the fund is carried out, there is unpredictable risk of financial change that could be a result of vast amount of dollars changing position in the economic cycle (from public to private hands, essentially). For example, it is possible to see in the immediate and intermediate time-lines, that changing the venue of the fund from public to private hands will create an inflation in the prices of equities that the private sector will pursue with the newly injected money.

Another example of the possible effects of a privatization change is the "doomsday" scenario in which a private fund has poor yields, or even become insolvent. Under such circumstances, there is the question of responsibility for the retirement of the affected employees who contributed to that insolvent fund. The "doomsday" scenario also goes to the issue of personal responsibility and the financial accountability of the U.S. government.

Other concrete side-effect can also be involved in any change of the Social Security fund, namely that the U.S. demography is about to see its largest retirement wave as the "baby boomers" start to retire in the next two decades. Change in the structure of the Social Security program comes into doubt in light of the introduction of the large group into the benefit-receiving side of the fund. The ramification of any proposed change in the structure of administration of the fund is not only affecting the contribution population, but also that of the retirees, specifically casting a shadow on continuing the current level of benefits. Another example of possible ramification is the one of accumulation of wealth: can the investment of funds in the private sector be simply an empty promise of "easy money"? Are the yields on such investments really going to provide a higher level of personal funds for retirement along with an accumulation of wealth? Finally, any investigation of the Social Security fund, and in particular changes to it, needs to take in account the effect such a change will have on the inflow of money to the Federal Government -- will a privatization action take any toll or, conversely, improve, the funding of the U.S. government?

Examination and Evaluation

The paper asks the following question: The scope of the paper is within these two elements: (1) the level of "benefits" distrubuted (from fund transfer) and (2) the level of payroll taxation. Within this scope, will privatizing the Social Security program enhance (or maintain) the benefits and reduce or maintain the employment taxes? If a valid and substantiated answer to this question is yes, then the conclusion of this paper will be that the proposal by President Bush should be implemented.

This core question as stated above will be answered in respect to the proposal made by President Bush. The method of using the Bush proposal to answer the question is as follows: the Bush proposal, or any other proposal, was made under certain assumptions. Once these assumptions are stated, certein arguments are made, arriving at the conclusion. The paper will utilize an "audit program" model to evaluate the Bush proposal overall. As in a financial audit, the auditor takes three general steps to evaluating the assertion made by the auditee. After the three general steps are completed, a conclusion about the validity of the assertion can be made.

Control Risk

First, the paper will evaluate the level of Control Risk, mapped to the political agenda of President Bush. However, because of the inherit instability of politicized proposal, it is fair to evaluate control risk as "high" which, under this audit model neccessitates in the auditor a high level regarding skepticism to any assertion.

Mathematical Accuarcy

The second step in an audit is one of Mathematical Accuracy mapped to the validity of the argument. The argument presented by President Bush needs to be valid and complete. An example of an invalid argument will be one where the conclusion does not follow from the assumption of the Bush proposal. Or, if there are internal contradiction between assumptions or conclusion, the argument is rendered invalid. An incomplete argument is one where additional conclusions can be drawn from the assumptions stated, or if there are unstated assumptions that lead to any conclusion. If the latter occurs, an investigation of the effect of such unstated assumptions has to take place to see if they invalidated any argument or a portion of it. For example, in his argument president Bush declares that statistic "A" had been cited (low unemployment) and that statistic "B" had been cited (the Social Security existed for four decades.) No relationship between "A" and "B" is shown. The Bush proposal goes on to argue that the presence of "B" is a proof for the presence of "A". This of course is completely unreasonable and is discarded from serious debate as an invalid argument.

Overall, this step is purely logical: the paper will present assumptions, arguments and conclusions made by President Bush as the "building blocks" of the proposal. These building blocks are an important tool to understand the issue at large -- they can provide simplification and clarification of the issues on hand.

Substantiation

The third step in the "audit program" model is Substantiation of assertions, mapped to the accuracy of the assumptions. A substantiation is simply a confirmation of the assumptions by facts and reality. If an assumption is found incorrect by factual data, then it is rendered invalid and any argument based on that assumption is too, invalid. Further, a vague assumption can be rendered invalid if a precise definition of the assumption leads to invalidating the argument it supports. For example, the Bush proposal refers to "Taxes paid by Families". It is not specific enough: are "Taxes" monies actually paid? Are they taxes actually owed? Are "Taxes" money paid also to State and Local authorities? In this example, the definition of "Taxes" -- as used in the the assumption -- is vague, leading to a potential invalidation of the argument that is based on this particular assumption.

Finally, by following the audit program through its three general steps: evaluation of control-risk, computation of validity and substantiation by facts, the auditor -- this paper -- will render an opinion on whether the Bush proposal as presented herein is overall valid and substantiated. The conclusion of this critique is not intended to answer the question of whether all proposals for privatizing social security are good or bad. This paper introduces the subject through a particular proposal, one to be expected to be close to the final proposal, if any, because of the supported of the newly elected president. Thus, the conclusion of this evaluation will address the validity of this particular proposal by President Bush, citing its strengths and weaknesses.

Further, this paper will attempt to shed light on points or issues that are additional to the Bush proposal itself, by way of footnotes and comments, in an informal manner.

Mathematical Accuracy : Argument's Validity

In order to examine the validity of the proposal, a complete copy of the proposal is attached with this paper (exhibits "I" and "II"). The proposal, titled "Saving Social Security and Medicare" is roughly divided into three parts: discussion of Social Security, discussion of Medicare and a section of tables, quotes and other miscellanea. In order to create the "building blocks" of assumptions, arguments and conclusion within the Bush proposal, the paper concentrates on the first section, immediately following the Executive Summary in "I. Challenge and Opportunity."⁽³⁾

The following paragraphs have been mapped to labels to further assist in reconstructing the Bush proposal (the first two paragraphs are a reiteration of the argument, and because they are stated later on, they were not labeled). They are classified as assumptions or argument and displayed graphically in exhibit "II":

A. The Baby Boomers generation is about to re