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Privatizing Social Security

What hath Ida Mae Fuller wrought?Certainly she had no idea of the turmoil and angst that would eventually flow from the $22.54 check she received nearly 60 years ago as the nation’s first Social Security recipient. Ida Mae died in 1975 at 100 after collecting more than $20,000 in Social Security benefits, far more money …

What hath Ida Mae Fuller wrought?

Certainly she had no idea of the turmoil and angst that would eventually flow from the $22.54 check she received nearly 60 years ago as the nation’s first Social Security recipient. Ida Mae died in 1975 at 100 after collecting more than $20,000 in Social Security benefits, far more money than she had ever contributed to the system. Her get-more-than-you-give retirement plan crystallizes the dilemma facing Social Security: not enough money will be going into the system to match what will be going out once baby boomers start retiring.

Over the years, Social Security has managed to build a huge surplus to cover shortfalls in what was essentially designed as a pay-as-you-go program. Currently, roughly three workers contributing to the system cover the benefits of one recipient. That results in an annual surplus of $30 billion, the amount collected over and above the benefits paid out. But in 2008, baby boomers, a 76-million-person chunk of the population, the largest generation in the nation’s history, start to retire.

At that point, there will no longer be a $30 billion surplus. What does Congress do then? Raise Social Security taxes? Reduce benefits to recipients who have been paying into the system all their working lives? Raise the cap on taxable wages, which is currently $68,400?

And it only gets worse. By 2030, the number of workers-per-beneficiary drops to two, just when a statistical analysis shows the Social Security surplus will be just about liquidated. The same analysis indicates a deficit in 2032, when money entering the system figures to cover only about 75 percent of the benefits going out.

Currently, a variety of experts have offered ideas to stave off the impending crisis. Many of them recall that Social Security was not created as the sole income for retirees, but rather to supplement pension plans and savings. In that spirit, privatizing a portion of the contributor’s Social Security taxes has entered the arena of discussion. In fact, a bipartisan commission recently completed a 15-month study by recommending 2 percent of the 12.4 percent Social Security payroll tax be allotted for investment options chosen by the contributor. Such a plan still allows the bulk of the taxes to cover recipient benefits but also allows contributors to search for higher investment opportunities for when they move into the beneficiary ranks. After all, when considering investment strategies, the stock market over the past 70 years has shown an average annual return of 10 percent while Social Security returns have averaged between 2 and 3 percent annually.

Both domestically and internationally, private investment of retirement funds has proved successful. In the U.S., more than 1 million state and local government employees exempted from Social Security enjoy higher levels of income from their government-administered private pension plans than they would have through Social Security. In countries like Chile, Australia, Mexico, Singapore, and Great Britain, workers have been given the option of investing in private savings plans and have realized spectacular results when compared to their countries’ retirement programs.

If Social Security privatization does take place, it will be those companies that concentrate on financial services that will stand to benefit. Here are some of them:

American Express. The asset management segment, known as the Financial Advisors division, of this diversified international company, stands to benefit most from retirement savings plans. AXP is realizing strong results across all product and service lines. Currently, international revenues comprise 33 percent of the total mix, with management maintaining an internal goal of 50 percent by 2000. To achieve the 50 percent level, AXP will have to grow their international operations by 25 percent per annum thus favorable impacting both earnings and the company’s stock price.

Currently 26 percent of AXP revenues-but 35 percent of overall net income-comes from the Financial Advisors division, which will clearly benefit from the increased push by the baby boomers to save for retirement.

Travelers Group/Citicorp. Renamed CitiGroup, assuming all goes according to plan, this merger of two financial services companies will offer a one-stop shopping center for retirement investments. The ability of CCI/TRV to cross-sell products and services to each others clients will continue to benefit the bottom line.

Community Bank Systems. Community Bank’s strategy focuses on consolidating the banking services of the citizens of rural New York State. By avoiding the competition of the larger cities in NY, they have become the dominant player in the smaller towns.

Community’s trust and investment department will benefit from the local presence in the smaller towns as most of the super-regional and national firms position themselves in the larger population centers. As a result, CBU enjoys healthy market share and profitability in its operating areas.

Banc One. Banc One reported a 14 percent year over year improvement in first quarter results, which reflected good consumer loan growth, an increase in deposits, and lower expenses, mitigated by lower fees. The shortfall in earnings was attributed to lower than expected credit card loan growth coupled with an increase in loan loss provisions. The company’s current valuation reflects the lowest P/E multiple in the regional bank sector. Also, valuation is likely being impacted by the equity arbitrage associated with acquisition of First Chicago with stock.


David Elias is president and chief investment officer of Elias Asset Management, a Williamsville, NY-based investment firm.

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