Privatization of social security: arguments for and against

Privatization has been an issue if much debate during this presidential election. In particular, privatization as it relates to social security reform has been the primary focus. The purpose of this discussion is the provide arguments for privatization and against privatization. The discussion will also cite situations and examples both in America and abroad as to why or why not privatization is a good idea, and why it may or may not work. Let us begin our discussion by defining privatization.

Privatization is defined as the altering of a public enterprise into a private enterprise (Scott). According to a book entitled Privatization and Economic Performance, Privatization is designed to "improve industry performance by increasing the role of market forces." (Bishop et al.) In many cases, privatization comes about after there is a problem in maintaining the financing of the public enterprise. Such is the case with the issue of social security in the United States.

Arguments for privatization

There are many reasons that are often presented as to why privatization is important and essential. According to a book, entitled Privatization and Capital Market Development: Strategies to Promote Economic Growth privatization can be extremely beneficial to a country because it relieves the government of certain obligations. (Ciobanu and McLindon)

Once the government is free of this obligation, they can focus on the fundamental responsibilities of government. (Ciobanu and McLindon) The authors explain that privatization "enables a government to shift its portfolio of interventions out of areas of the economy in which the private sector is able to operate more efficiently and productively." (Ciobanu and McLindon)

The book also explains that the main purpose of government is to for the adequate investment in its citizenry (Ciobanu and McLindon). The authors contend that when the government attempts to take on more responsibility than it can handle, the results can be more harmful than helpful (Ciobanu and McLindon). In addition, the book asserts that as a governments resources decrease and demands of the population increase governments cannot afford to ignore the benefits that privatization can provide (Ciobanu and McLindon).

Proponents of privatization also contend that several factors contribute to the need for and success of privatization in different nations. The authors of the book Privatization and Economic Performance contend that there are three solid reasons for privatization. The book describes these reasons as finance, information and control (Bishop et al.). The authors contend

The financing of both government and the firm is affected by privatization. The government raises finance in the process of disposing of assets; firms are free to raise finance from capital markets. Information is of relevance in setting prices. Competition ensures that prices are consistent with efficient allocation of resources and lowest costs of supply. Even in the absence of competition it has been suggested that privatization may allow prices to be imposed that encourage greater efficiency of supply. Where price mechanisms alone are not adequate then control is of relevance. Changes in ownership are most directly associated with changes in control. Privatization programmes in principle involve a weakening in control exerted by the state and a transfer of control to private investors (Bishop et al.)."

As it relates to social security reform in America, privatization is viewed by many as a cure fir the impeding insecurity of the social security system. Economists have concluded that the current social security system is broken and will not be able to provide retirement funds to American in the future. Some believe that privatization will improve the situation.

An article found in the Journal of Economic Issue, asserts that the privatization of social security system can prove to be beneficial if it is implemented correctly (Niggle).

Arguments against Privatization

One of the main arguments against the privatization of government-operated enterprises is that there is no real financial benefit (Shenk). An article in the Washington Post asserts that privatization is not always better or more cost efficient than public sector programs. The article asserts that although there is a contention that privatization is more beneficial to taxpayers, the actual track record of privatization tells a different story (Shenk). The author explains that privatization can lead to problems with contractors due to a lack of competition, fraud and negligence on the part of the private entity (Shenk).

There is also an inference that because private organizations are market driven, their ability to make a difference is sometimes unpredictable. According to a report published by the Economic Policy Institute, there are some substantial problems with privatization (The Problems with Privatization). The report asserts that as it pertains to social security reform privatization is risky. This increased risk is associated with the fact that peoples retirement income would be exposed to and dependent upon the performance of the stock market (The Problems with Privatization). In addition, privatization would create a structure that is unbalanced. The report asserts that no individual gets rich off of the current program, but if social security is privatized there will be huge disparities in the amount of money that people receive (The Problems with Privatization). This may lead to a higher percentage of retirees that live below the poverty line.

The article also contends that the progressive benefit structure of social security will be lost. The report contends that current benefits allow low income workers to receive higher portion of the share of earnings (The Problems with Privatization). The report explains typical low-wage worker will receive an annual retirement benefit that is slightly more than half as large (53%) as were her average yearly earnings. Benefits for a high-wage worker are larger, but just one-third (32%) of her annual earnings. This progressive benefit structure that boosts the retirement incomes of low- and middle-wage workers will be lost when everyone puts a share of their own earnings into their own private account." (The Problems with Privatization)

In addition, the report asserts that there will be an immediate tax increase, and privatization will increase the occurrences of fraud and abuse (The Problems with Privatization).

Abroad

Like the United States, other countries have attempted to use privatization to make various entities more productive and efficient. Eastern Europe is a prime example of the impact that privatization can have on various countries. According to a book entitled Privatization in Central and Eastern Europe: Perspectives and Approaches, explains that in countries such as Hungary, the Czech Republic, Slovakia, and Poland there was a need to restructure their economies. The authors explain that even though the private sector in Central Europe was between 55% and 65% of the total economies in 1994, many Hungarian, Czech and Polish enterprises remained unprivatized. The author explains that international bodies and economists emphasized the need for privatization in these nations.

However, the book contends that "premature privatization of state-owned enterprises may have aggravated existing structural inefficiencies without ensuring the development of new private investments." (Hopps and Iatridis)

Conclusion

The purpose of this discussion was the provide arguments for privatization and against privatization. We found that arguments for privatization assert that it makes enterprises and efficient. Our investigation also found that arguments against privatization assert that it creates an environment that is ripe for fraud and deception.

The discussion also cited situations and examples both in America and abroad as to why or why not privatization is a good idea, and why it may or may not work. We found that there have been negative consequences to privatization in America and Eastern Europe.