Social Security Privatization: Good Idea or Bad?

Writing today in the Detroit Lakes online, Donald A. Johnson makes an interesting case against privatization of Social Security, arguing that it is "...the worst idea ever imagined."  He contrasts the longevity of this program with that of many prominent banks:

"What do Drexel Barnum Lambert, Lehman Brothers, Madoff Investment Securities, Wachovia, Washington Mutual, CIT Group, Merrill Lynch, Bear Stearns, AIG, and Citi Group, all have in common? They were all highly regarded private investment firms that were incorporated after the Social Security Administration was established in 1932 and went bankrupt or were bailed out before going bankrupt, in the last 30 years. "

He also points out that the fees and overhead of the banks that remain in operation are considerably greater than those at the Social Security Administration - no fees and overhead less than 1%. 

While I am inclined to agree with his premise - Social Security privatization is not a good idea - I think his arguments are apples to oranges.  Social Security is not an investment program designed to generate a nest egg.  Rather, it is an insurance program intended to provide a guaranteed annuity that adjusts for inflation each year.  In fact, Mr. Johnson inadvertently makes this case very well in pointing out the inherent risk involved in the financial markets, risks that have paid off rather poorly over the last ten years or so.  On the other hand, you won't find many that argue that the returns on the money paid to Social Security are very good, and they are certainly worse than they were a generation or two ago, as was reported recently in this Associated Press article.  The point is that Social Security is insurance.  For instance, it includes benefits for disability that you will not receive if you are fortunate enough to avoid becoming disabled.  It also likely won't pay off if you don't live long enough to start collecting retirement benefits (might still pay off for survivors in this case).  And, if you happen to live long enough, it might actually turn out to be a good investment after all - that's when you need it to have been a good investment, a kind of longevity insurance.

Prospective retirees of modest to moderate means need to plan their Social Security claiming strategy coupled with any other guaranteed cash flows they may have (e.g., a pension) to ensure enough income to cover basic needs no matter how long they live.  Then the other savings in the markets can be used judiciously for those activities that may enrich their lives, like travel, entertainment or leaving a legacy - uses of money that are not essential to getting by.