Why President Bush’s Proposal to Privatize Social Security Is Bad For America

President Bush's proposal to privatize Social Security fails because it does not pass the Hurdle Rate Test – the numbers do not add up. Two supplementary issues make the proposal both unworkable and premature.

(PRWEB) April 12, 2005

President Bush is playing fast and slipshod with the truth, again; by making a “mountain out of a molehill” again, this time concerning Social Security (SS). Two key questions need answering: 1) do we have a Social Security crisis?; and 2) does President Bush’s proposal to privatize Social Security make sense to Americans?

Is there a crisis? In fact, only minor tweaks to the current SS system are needed to ensure all promised benefits are paid says the Congressional Budget Office. Change the budget by less than 3 percent of federal spending, about what we are spending on the Bush lead invasion and occupation of Iraq, and the SS system is sound into the 22nd century. There is no SS crisis, it is simply a matter of political priorities.

To answer the second question requires an understanding of what the current Social Security system is returning to beneficiaries, says Eric L. Prentis author of "The Astute Investor." President Bush’s proposal will have to do better then the Hurdle Rate Test to make sense.

Current SS benefits are coupled to increases in wages which due to productivity increases grow at a faster rate than inflation in the economy. The components of the Hurdle Rate are:

1) Average inflation rate in the U.S. economy has grown by 3.5% per year: based on The Consumer Price Index, since 1913.

2) The growth in real wages increases by approximately 2% per year.

3) In President Bush’s proposal, there is a 3% Offset – money in SS Private Accounts which will be returned to the federal government.

4) It is expected that SS Private Accounts will have a management fee of 0.3%

Inflation Rate                     3.5%

Growth in Real Wages                2.0%

Federal Government Offset         3.0%

Management Fee                     0.3%

                 Hurdle Rate     8.8%

The Hurdle Rate of 8.8% is impossible for a safe all-bond SS Private Account to match. Even President Bush’s recommended portfolio of 50% in stocks, 30% in investment grade corporate bonds, and 20% in government bonds will not be enough to overcome the Hurdle Rate Test – once it is realized that current retirees receive SS cost-of-living increases which SS Private Accounts will not enjoy.

While the SS Private Account numbers do not add up, two further important issues arise: 1) corporate governance; and 2) assumptions about the future. The first supplementary issue makes President Bush’s proposal unworkable, and the second makes tackling SS – at this time – premature.

Americans are right to be skeptical of President Bush’s proposal to privatize Social Security, and should not be scared or fooled into making hasty major revisions to the current SS system – thereby only making things worse. The welfare of approximately 47 million Americans is too important to be sacrificed on the alter of political hubris.

Eric L. Prentis, Ph.D., is the author of "The Astute Investor" – ISBN: 0-9759660-0-6, and is an expert on the stock market. He has held a professional position as a registered investment adviser, and was on the faculty teaching in the graduate business program at the University of Southern California. This makes him superbly and uniquely qualified, from the standpoint of the stock market, to comment on President Bush’s proposal to privatize social security.        

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