Privitazation Nation
By Niko Karvounis, Harvard University

Privatization is a seemingly harmless term that has very important implications for America. George W. Bush has spearheaded a privatization effort of standard American benefits like Social Security. The idea behind privatization is that citizens will get a smaller amount of guaranteed federal aid upon retirement, instead having personal accounts that they can manage.

But the current system is pay as you go—meaning, that the taxes working folks are paying right now is given to older folks who qualify for it. There is no Social Security (SS) fund—it’s a fluid transfer of funds from taxpayers to SS receivers. Take out the payers in a shift towards private accounts, and a big chunk of recipients are left without the SS payments that they’ve worked for and expected for years. You can ask people to pay twice—simultaneously into the system until privatization takes hold and into their personal accounts, but who wants to pay for something that won’t benefit them?

True, any SS reform has to take the pay-as-you-go issue into account, but privatization is too problematic to be the course we choose. Conservatives like to think that giving citizens private accounts for SS will allow people to invest and increase their funds beyond anything the government could ever provide. They are partly right; Americans will be forced to invest for their personal funds to be any kind of asset.

According to the U.S. Social Security Administration, workers need about 70 percent of their pre-retirement earnings to comfortably maintain their standard of living. Under current law, if you have average earnings, your SS retirement benefits will replace only about 40 percent, meaning that Americans already must supplement their benefits. At the same time, labor compensation is growing at its slowest rate since WWII. Simultaneously, Americans’ take-home pay relative to national income is lower than it has been in over 70 years, while the cost for health care, gasoline, and education have skyrocketed. Together these facts mean that as retirement benefits are reduced and the effectiveness of personal funds are reduced due to poor labor compensation and high costs of necessities, more Americans would have to rely heavily on “supplements”.

These supplements would primarily be investments. With privatization, a very large new group of potential investors is created. Supposedly, these new investors are supposed to help the economy boom while at the same time increasing their own ‘nest egg’. But more likely, this new group of investors— including Americans of lower income, financially constrained, and inexperienced in money managing—will become the targets of economics exploitation. Think there are scams going on now in Wall Street and corporate America? Imagine when the pool of victims is indefinitely increased. As P.T. Barnum might say today, there’s a sucker entering retirement every minute.

This phenomenon is not unprecedented. The rights revolution made more people cognizant of what they were owed as individuals—perhaps overly cognizant, and lawyers have taken advantage of that awareness. The emerging pre-eminence of personal recompense opened up a whole new market for lawyers, as their services were applicable to a myriad of persons and situations.

But the preponderance of the lawyer in our society also led to a drop in the reliability and general trustworthiness of legal pursuits. It is easy to see how lawyers have consciously profited the new essentialness ascribed to their profession. “Have you ever been personally injured?” ask local lawyers in a poorly produced advertisements. Most viewers don’t know if they have or haven’t—but attorneys are more than happy to ‘consult’ you in order to inform you that you are, in fact, a victim.

A privatization revolution will give birth to a similar phenomenon among the investment community. It will lead to an increased pool of inexperienced potential investors, and the investing community is going to respond by taking ‘reaching out’ to lower income Americans in a similar fashion. Desperate to support themselves and leave something for their children as their life draws to a close, low to moderate income senior citizens make perfect targets. One can imagine the day when third-rate investment advisors have local television ads claiming, “ you are entitled to improving your future through investing your retirement funds!”.

There are, of course, services that exist to help you invest and take care of your investments. But these services cost money. Assuming the elderly become a viable source of investments, these services presumably would be made more readily available to them. But how are we to ensure the quality of these services? How many of Morgan Stanley’s “big clients” are going to be low income elderly Americans?

No, most elderly Americans will be forced to use other services. There are pension and mutual funds out there, yes, but there are also hedge funds-- which are exempt from Securities and Exchange Commission reporting requirements, as well as from regulatory restrictions. Further, employees of companies approaching retirement could very well be encouraged to invest their SS funds in floundering company stock and get ripped off, a la the Enron scandal.

No matter what the method, successful investing takes the consultation of a stockbroker. The leverage and lack of accountability granted to this profession once an entire society relies on it as the primary experts on retirement stability is mind-boggling. The fact that the world in which these men and women navigate is already ripe with abuses, fraud, and scandal, makes the prospect of placing Americans’ futures in their hand less than comforting.

Privatization would have to be coupled with regulation and education to be even marginally beneficial. Government initiatives for free investment clinics would be necessary. Investment education would become crucial. Corporate regulations would have to be strengthened across the market, or regulated funds would have to he aggressively marketed and promoted. Corporate accountability laws would have to be enforced strongly and consistently. Retirement funds are something that our government has assured its people for decades—if the government is to encourage the elderly to throw their money in the market, they have to ensure the integrity and benefits of those funds.

But the proponents of privatization are also the proponents of small government; They don’t like regulation and accountability. They want to lower capital gains taxes and reduce regulations in order to encourage people to invest. Show that they have more to gain, and people invest. But they don’t see that increasing precautionary measures for the sake of the investors also encourages investment. Show that they have less to lose, and people also invest.

Privatization proponents never speak on the issue of increased regulation—probably because they don’t particularly care. The biggest advocates of privatization are corporate bigwigs such as American Express and Merrill Lynch, and conservative politicians with strong ties to the business world—the folks most likely to profit off the backs of retiring Americans through privatization. The vulnerability of the American worker, the character of privatization advocates, and the focus on above all lowering ‘barriers’ to investment, makes it clear that privatization will be coupled with exploitation long before it is coupled with the appropriate education and regulation.


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