Advocates for privatization fail to recognize the value that Social Security's represents to beneficiaries because they base their calculations of returns exclusively on the retirement benefits that individual workers receive. They ignore other important aspects of the program, such as disability benefits and survivors' benefits for dependent children and spouses.
Social Security is much more than a retirement plan. It is an insurance policy against disability, premature death and an impoverished old age after a lifetime of low earnings. Social Security spreads the risk of poverty from these events among all workers – it does not lay the burden on any single individual.
Any insurance company that charged its customers, on average, a dollar for each dollar in benefits it paid out would quickly go out of business. In the real world, insurers actually charge customers approximately $1.18 for each dollar in benefits they pay out. Any fair comparison of Social Security to the private sector must include this premium in its calculations.
Social Security is also an insurance policy against something else: inflation. Its retirement payments take the form of a real valued annuity: a payment that continues as long as the worker (and/or spouse) lives, and is adjusted for inflation.
It is difficult if not prohibitively expensive for most Americans to buy in the private market an annuity that is protected against inflation, and workers typically pay premiums of 15 percent to 20 percent to purchase an annuity that is not indexed to the cost of living.
When you factor in these four insurance features
- Protection against poverty from disability.
- Protection against poverty from premature death of a parent or spouse.
- Protection against an impoverished old age.
- Protection against inflation – the benefit grows with costs of living.
- Protection for life – the benefit is guaranteed in retirement until death.
The value of Social Security is significant.
No private substitute can offer anywhere near as good a deal.