MW All the reasons privatizing Social Security would be a terrible idea

By Brett Arends

Converting Social Security into millions of individual investment accounts would end the program as we know it

Treasury Secretary Scott Bessent set off a firestorm this week when he said that the Trump administration had just taken the first steps toward a "back door for privatizing Social Security."

Bessent, speaking to reporters at MAGA news site Breitbart, said this was a feature of the $1,000 investment accounts created for newborns by the One Big Beautiful Bill Act, which President Donald Trump recently signed into law.

"At the end of the day, I am not sure when the distribution level date should be, whether it should be 30 and you can buy a house? Should it be 60? But in a way, it is a back door for privatizing Social Security," Bessent said. "If, all of a sudden, these accounts grow and you have in the hundreds of thousands of dollars for your retirement, that's a game-changer, too."

Cue the inevitable cleanup. Both Bessent and White House press spokeswoman Karoline Leavitt quickly said that these accounts would be a "supplement" to Social Security, not a replacement for it.

Whatever Bessent and the administration really think, let's make one thing absolutely clear. Converting Social Security into millions of individual investment accounts, as some on the right have proposed, would not merely constitute "privatizing" Social Security. It would involve breaking up or ending Social Security as we know it - abolishing the program and putting something new in its place.

"Privatization" means converting something under government ownership and control into something under private ownership (and often, though not always, private control). It is a perfectly respectable policy. Towns, states and the federal government do it every time they sell off, say, a parcel of land or an old building to private developers, or when they hire private contractors to collect the trash. Many international airlines and some international car companies are the products of privatization: They were created and initially owned by national governments, and then sold off. This often worked out very well for taxpayers and customers (though not always for stockholders).

I was living in Great Britain when Prime Minister Margaret Thatcher reinvigorated the economy, in part, through massive privatization of moribund state-controlled industries. There was no reason for Her Majesty's Government to own and operate the Jaguar car company or British Airways.

Truly "privatizing" Social Security would mean handing over administration of the program and its trust fund to a private company, such as Fidelity or Vanguard, or possibly taking it public on the stock market. There is nothing particularly wrong with this idea in theory, but it would make zero sense in practice. Social Security is already run on a shoestring, while its investment policy - bonds, bonds and only bonds - has been set by Congress. How a private company could add value while extracting a profit for its own stockholders is hard to imagine.

But this is not what has been proposed. Instead, proponents of "privatizing" Social Security are talking about winding down the Social Security trust fund itself, in whole or in part, and replacing it with tens of millions of individual investment accounts. Some or all of the 12.4% flat Social Security payroll taxes would go into these accounts instead of the Social Security trust fund.

This is what Scott Bessent was alluding to when he told Breitbart that the new individual investment accounts were a back door to privatization. And, most famously, this is what President George W. Bush actually proposed 20 years ago - a proposal that sank like a lead balloon.

Whatever you think of this idea, it would be the beginning of the end of Social Security as we know it.

The current program is what's known as a defined-benefit program, or pension. You are not responsible for the investment returns. What you get out each month in retirement simply depends on what you put in while you were working.

But Social Security is also an insurance program.

It insures us against poverty in old age. That's why each of us gets credit for 90% of the wages we earn up to a low level, currently $1,226 a month, but much lower percentages for the wages we earn above that. The top priority of the program is that everybody who qualifies gets at least something to live on in retirement.

It insures us against longevity. Social Security pays you until you die, whether that happens when you are young or very, very old.

And it insures us against inflation. The annual cost-of-living adjustment, although it comes a year in arrears, raises benefits in line with consumer prices.

Gradually converting some or all of this program into about 250 million individual accounts would change all of that. (There are currently about 180 million workers paying into the system and 70 million beneficiaries drawing from it.)

The new accounts would have no defined-benefit feature. What you got out at the end would depend not only on your contributions but also on your investment returns. Crucially, the accounts would also have no insurance feature. Higher earners would not cross-subsidize low earners. Those who died young would not cross-subsidize those who lived to 110. Nobody would protect your retirement income from inflation.

This is one of those ideas that sounds better the less you think about it. Once you get into the details, as people did when Bush proposed the idea, it gets less appealing.

Would account owners be free to invest their money in anything? If so, what would happen to those who lost their money? Would they be left to die on park benches or in poorhouses (learning a valuable lesson for their next life - so long as you believe in reincarnation)? If people wouldn't be free to invest in anything, what would be the rules, and what would be the reasoning behind them? Who would administer these accounts? Back in 2005, I was covering mutual-fund companies for a newspaper in Boston, and privately none of them expressed any interest in participating in such a program. They saw high costs, low fees and excruciating regulations.

What would we do about longevity and inflation risk?

These accounts also look a lot more appealing in the midst of a massive bull market on Wall Street - like the one we have seen recently - than they do at other times. Wait until you see a bear market.

The biggest issue may be what is sometimes called the fallacy of composition. You or I might individually benefit from this change. But what would happen to the overall picture? Even if you don't personally care about lots of old people living in desperate poverty, their existence would create all sorts of challenges and issues for America. As for those stock-market returns: You might be amazed at what happens to your Walmart $(WMT)$ or Amazon $(AMZN.UK)$ stock once those companies start losing customers to poverty and premature death.

Proponents of this idea usually characterize these accounts as a supplement to rather than a total replacement of Social Security. (This, indeed, is what Bessent and the White House have said.) They aren't talking about winding down the Social Security trust fund completely, they say.

Yes, it's an important distinction. But while it may soften the criticisms, it doesn't refute them. We already have individual retirement accounts: They are known as IRA and 401(k) plans. Would changes to Social Security be in addition to those? If so, what would be the differences, and why?

Most important, when you start to take some of the contributions to Social Security and divert them to private accounts, you upset the financing of the entire program. Would the current cross subsidies continue? If so, who would pay them? If owners of individual accounts are paying less in cross subsidies, who will take up the slack? Taxpayers? If so, this is no gain at all. It's just a shell game.

The main obvious benefit of these individual accounts is that the owners could invest their retirement money for the long term in stocks, which have traditionally generated very high returns over many decades, as opposed to current Social Security policy of keeping all its money in bonds, which haven't.

But here's the rebuttal: We do not have to break up Social Security to do that.

All Congress has to do is pass a law directing the Social Security trust fund to start investing some of its money in the stock market. This, after all, is what pretty much every other pension fund around the world does, including those run by U.S. states, cities and towns as well as by foreign governments.

The logical approach would be to have fund move gradually, though not too gradually, toward an allocation of 60% stocks and 40% bonds. That's the balance generally used as a benchmark across the pension industry.

As the fund is currently about $2.7 trillion, that would move about $1.6 trillion into stocks. The most rational policy would be to invest that money in a global index fund, one that invests in markets all around the world and doesn't pick stocks. (Whether to include emerging markets or just developed-world markets is a debate for another day.)

None of the arguments against this idea hold any more water than a plastic sieve that has been used for target practice by SEAL Team Six. The only defenses of the status quo are stupidity, inertia and the greedy self-interest of politicians who use Social Security contributions as taxes without having to call them that.

If Social Security's trust fund had been invested in stocks, as it should have been all along, there would be no funding crisis today. None. Zero.

It speaks volumes that stupidity, inertia and the greedy self-interest of politicians has been winning out over common sense and the needs of the public for decades with no end in sight.

(MORE TO FOLLOW) Dow Jones Newswires

August 02, 2025 11:46 ET (15:46 GMT)

Copyright (c) 2025 Dow Jones & Company, Inc.