Privatizing Social Security

Re your Dec. 1 editorial, “Privatization Offers Option for Social Security,” in which you state that American workers are less and less confident that Social Security will be there for them when they retire:

You suggest that a privatized system be instituted in its place. Some of the features of Chile’s privatized system were described, and you indicated that a prolonged educational campaign be conducted to inform the American public of its strengths. For the sake of a balanced campaign, shouldn’t the weaknesses of the Chilean system as compared to the U.S. system be publicized as well?

The four-way protection of Social Security, retirement, survivors, disability and health insurance, costs American workers 7.65% in Social Security taxes up to certain prescribed wage limits. In Chile, the same four-way protection costs about 30% of salary. In the U.S., benefits are indexed to the cost of living; in Chile they are not. In Chile the risks of providing for retirement fall entirely on the worker, making it a rather fertile field for financial advisors (at a cost to the worker). And because of this self-reliance, there are a large number of delinquent contributions by Chilean workers into the system. The long-range effect of this is yet to be determined. This cannot happen in Social Security’s mandatory FICA system.

Finally, in Chile the administrative expenses to operate its privatized system cost about 20 cents on the dollar. Less than one penny of every FICA tax dollar is used to administer Social Security.

The proponents of privatization are also faced with a rather significant problem, transition costs. The actuaries of Social Security have predicted that transition costs in changing from the present system to one that is privatized would cost about $7 trillion. The privatizers proposed to raise Social Security taxes by 1.6% to pay for it.

SAWL WOOLFSON

Public Affairs Specialist

Social Security Administration

New York