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During the 2004 presidential election President Bush campaigned for social security reform. In 2005 the White House released an analysis and recommendation. He cited the issue in his state of the union address and it was the subject of the thoroughly publicized 60-stops in 60-days PR campaign.
The intended reform included the right of workers to make stock and bond investments with a 4 percentage point pull from their income. According to the White House's "Strengthening Social Security for the 21st Century" this personal retirement account would give workers the choice to opt into the plan and make investments in government bonds or "broad based investment funds." This proposal is loosely patterned on the existing Thrift Savings Plan (TSP) available to government employees.
The issue then died of neglect in the republican controlled Congress.
It may seem non-appropos to revisit this sunken issue just as America prepares for a social paradigm shift under president-elect Obama, however it is said that social issues come in tides. Voters are very interested in crime, education, national defense, taxes, health, retirement, and environment, but only two at a time, and only every two years. Hence this policy proposal will rise again and the current fiscal crisis provides such a mountain of data, it is a prime time for counter arguments to be indexed while fresh.
An intriguing poll was reported by Marketwatch in December 2004 (here) where Bostonites were asked about social security reform. Over half were in favor of privatizing retirement. Interestingly the poll included a question on whether there would be a "stock market crash similar to one in 1929 in their lifetime." The poll indicated 28% of Bush supporters and 51% of Kerry supporters believed such a market event was possible. In 2008 America has seen 15 banks fail, the biggest single day drop of market value in history -the Dow lost 778 points, worth $1.2 trillion dollars- and interest rates hit fifty year lows. Hard times for the portfolio, though it is not strictly a replay of the great depression; this fiscal crisis is truly global and will sweat the bloat from many markets, but it was triggered by over zealous debt marketing and a subsequent credit crisis.
The White House report did indicate that a privatized account would be voluntary, not apply to anyone over the age of 55 at the time of inception (thus current receivers' benefits would remain untouched), that portfolios would be guarded against the dangers of "sudden swings" in the market as a worker approached retirement, and that a "life cycle portfolio," a set of investment risk classes, would be arranged so that risk would lessen with age. The plan clearly acknowledges lulls in the market and if it adopted the TSP class of investments, would enable workers to buy into inflation indexed bonds to guard against temperamental fiscal seasons. There was also a built in assurance in the program proposal that workers would be unable to borrow against their retirement funds or access them prematurely.
Broadening of the TSP has its advantages. Nevertheless, in a CNN and Gallup poll conducted directly after the 2005 state of the union, only 40% approved of the idea while 55% thought it was a "bad idea." 30% said they believed workers who opted in would receive more and 28% saying that they would receive the same amount at retirement that the government provides. To project the true risks associated with such a plan, retirement accounts should be looked at in light of known investment behavior, rather than merely in comparison to an existing program which, by all accounts, would be improved by nearly any change (17% of those polled claiming the program was "in crisis" and 55% noting it has "major problems.")
Firstly, privatizing retirement does nothing to address the funding crisis facing social security. As the generation of baby boomers begin to leave their jobs, the ratio of workers to retirees will swing so that the number of people paying into the system is dwarfed by the number of recipients. The White House report notes that the private accounts would simply be an incentive and "better deal" for "young workers." Secondly, the AARP estimates transitioning the system over to private accounts would cost 2-3 trillion dollars. And incidentally, the provisions outlined in the proposal would not necessarily be those enacted if Congress were to pass legislation on the matter. Ensuring that workers could not borrow or exhaust their accounts prior to retirement would be an important issue to defend and that these accounts do not become fee ridden or taxed into inefficiency is a complicated matter. Thirdly, this proposal does provide a risk to the market itself; a huge influx of capital reflecting nothing more than investment desire would be blindly sewn into stocks and bonds, fluctuations would be due to the average age of Americans and preference for risk classes, as opposed to investor faith in a fiscal product. What of the bloat?
Investment trauma is the biggest problem.
Behavioral research indicates those who suffer losses on an investment will invest more conservatively when re-confronted with the scenario. Prospect theory indicates people are naturally conservative investors and emotional indicators are also likely to harden people against risk. So where is the assurance that the average worker will actually accrue greater returns under this system? Testimony and research provided by the Brookings Institute indicates that stocks "are substantially more variable over short periods of time than are the returns on safer assets, like U.S. Treasury bills." Not all workers are well versed in the stock market trends, wouldn't it be likely that those workers who lose money early in their speculation are more likely to be excessively conservative in their future investment and thus fail to maximize their potential earnings? Will investors who have suffered due to stock market fluctuations be less likely to buy stocks in other portfolios? And what of those who misjudge the volatility of their era? Between 1973 and 1975 the S&P index fell 50%, which still pails in comparison to our present devaluations. Even if those a few years from retirement were insulated from this shock, surely it would be devastating to the expectations of the middle aged. The amount they can expect at retirement would yo-yo with these changes. Would a huge percentage of Americans then pull their investments from market indexed funds and prefer treasury bonds? If such a move could be made, wouldn't it deepen any existing recession? Or cause one? As analysts looked to the market and hoped for a rebound, made recommendations and looked at sector sales, wouldn't a swift de-investment by the average American worker in the market be a sign of social distrust? Would people begin to predict drops in sales and act accordingly? How would this influence market analysis?
How trustworthy of an indicator would worker investment be? And how compelling? If Americans suddenly ran in droves to their retirement accounts, even if they could only do so at set times of the year, what prophetic impact would market watchers, foreign governments, and economists attach to the sudden sale or prolonged rejection of market tethered funds? Even if workers were to suddenly move their personal investment, that does not mean that individual would necessarily believe a recession was inevitable, that if it were in place that it would continue, but would other investors look at this aggregate behavior and assume it is a bear market? A recession in the making?
Furthermore, would the average American worker make investment decisions based on economic theories and the Wall Street Journal, or be prone to consult the Ouija board? Again, even if the average worker invested with sober rationality, if the image of the average account holder were that of an irresponsible, flighty investor, how would other countries judge our market? Will people look at the general upward tick of the Dow and forget about inflation, oil, or reason with the gambler's fallacy when considering their private accounts? 
If Americans suddenly wanted S&P indexed investment goods, would our trading partners feel more confident about investing and trading with us? In the reverse scenario, how would they feel? What sort of thermometer would these accounts be, and how could they hurt us? If there are answers to these questions and contingency plans, let them be discussed.
But there is one objection more.
Social security was initiated by President Roosevelt in 1935 (part of the new deal) as a social insurance policy for American workers. Eligible workers (or relatives of workers) are meant to receive a minimal payment each month based on the number of years paid into the system, age, and lifetime earnings. The system was intended to address the number of impoverished senior citizens. It provides a minimal, dependable, monthly "primary insurance amount." It was not meant to discourage private savings or generate an old-age pension that allowed for caviar and salmon. The private investment plan would pay out to workers an amount based not on the number of years working, but on the percentage contribution and the success of investment. There is no 'insurance' built into this system that the amount paid out is a survivable monthly sum. Backers of the private retirement account idea seem eager to separate the wheat from the chaff. At retirement some investors can enjoy greater rewards because they made wiser investments than others; they made the most of their resources. However there are already ample investment opportunities with which to do this. IRA's, online and in person investment portfolio consultants, treasury bonds, stocks, mutual funds, certificates of deposit, and countless other readily available investment opportunities (land, baseball cards, paintings, antique tea cups, etc).
The current condition where workers pay to social security and can then freely invest on their own time with their own resources contrasts with the privatized account idea by providing a minimal insurance. Existing social security cannot realize crippling investment loss. Privatized accounts will require the hiring and training of government employees (who will for by taxes just like existing social security workers), the change itself would be costly and the only thing it is guaranteed to save workers is the cost to buy and sell certain classes of investment goods. If the government limits the number of times or the times of the year workers can buy and sell, this free trading might not be highly valued as workers feel 'stuck' with bad investments, while allowing them to trade freely may damage the market as a whole and allow an imprudent investor to devastate his or her retirement portfolio.
In the end, why not just add the line "consider investing privately in expectation of your retirement" to every paycheck? If the government was feeling particularly philanthropic, they could offer an explanatory pamphlet about a nice conservative purchase, say, treasury bonds. Like this.
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