Privatizing Social Security
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Should Social Security Be Privatized?
Social Security privatization
The US Social Security program is intended to provide a safety net protecting American workers and their families in the event of retirement, disability, and early death. Moving Social Security benefits into private accounts is one proposal to prevent Social Security's predicted future financial shortfall. Privatization of Social Security would allow workers to control their own retirement money through personal investment accounts.

Supporters of private accounts contend that retirees would have the freedom to invest their retirement money in the stock market as they wish, theoretically earning higher returns than with government-invested funds.

Critics of privatizing Social Security argue that investing retirement money is complicated and risky because individuals can lose their retirement safety net through bad decisions. Read more...

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Social Security ProCon.org is a nonpartisan, nonprofit website that presents research, studies, and pro and con statements on questions related to whether or not social security should be privatized.
Did you know?
  1. The US Social Security program is the largest government program in the world and the single greatest expenditure, at $612 billion (20.8%), of the 2008 $2.9 trillion federal budget.

  2. When Social Security began in 1935 the contributions of 17 workers paid for the benefits of one retiree. In 2035 the estimated ratio will be 2.1 workers per beneficiary.

  3. Over 40 million post-World-War II baby boomers will reach the retirement age of 65 between 2010 and 2040.

  4. In Flemming v. Nestor (1960), the US Supreme Court upheld that Nestor, a retiring, legal immigrant who had paid into the system for 19 years, could be denied Social Security benefits for being deported as a member of the Communist Party.

  5. Since Social Security is an entitlement program and Congress can change the rules regarding benefit eligibility at any time, workers paying into the Social Security system do not have a right to receive Social Security benefits.
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Pro & Con Arguments: "Should Social Security Be Privatized?"
PRO Privatized Social Security
  1. When Social Security began in 1935, the contributions of 17 workers paid for the benefits of one retiree. In 2035 the estimated ratio will be 2.1 workers per beneficiary. Allowing individuals to contribute to their own private accounts may reduce future loss of money from fewer worker contributions. [3]

  2. Using the existing system to avert the pending collapse of Social Security will require deep cuts in benefits, heavy borrowing, or substantial tax hikes. A better solution is to switch to private investment accounts that will be funded with existing payroll tax thereby avoiding any benefit cuts or tax hikes.

  3. A medium income worker born on or after 1964 can expect a 1.93%-2.71% rate of return with the existing Social Security system. [4] Privatizing Social Security will put more money in the pockets of retirees. From 1926 to 2002, returns from S&P 500 investments average 6.9%-9.0%. [19]

  4. Private retirement accounts will give a worker contractual rights to retirement benefits, a right missing from the current Social Security system. In the 1960 US Supreme Court case Flemming v. Nestor, a retiring legal immigrant eligible for Social Security benefits, who paid into the system for 19 years, was denied his Social Security retirement money after being deported as a member of the Communist Party.

  5. Putting Social Security into private accounts does not expose retirement money to risk. These federally regulated personal accounts would allow individuals to invest only in diversified, approved mutual funds and not in single stocks or highly volatile stocks.

  6. Switching to personal retirement accounts would not result in burdensome transaction costs since the year-over-year growth rate over time of these investments will offset any extra costs the accounts incur.

  7. In the past, budget surpluses in Social Security were used by the federal government to fund other government spending. Keeping retirement money in private accounts will prevent it from being diverted for non-Social Security purposes. [5]

  8. Privatizing Social Security into individual investment accounts would boost economic growth by injecting money back into America's failing financial system.

  9. Removing the requirement of the federal government to provide retirement benefits reduces the bloated bureaucracy of the US government.

  10. The maximum Social Security tax in 1935 was $60; as of 2009 it is $11,000. Privatizing Social Security will alleviate this excessive taxation since private accounts will be taxed through the normal process of income taxation.

  11. Given the pending crisis, many young workers assume they will never see the money they are putting into the current Social Security program. Private accounts will be a transparent system that is more accurate an account of the relationship between today's earnings and future benefits.

  12. Privatizing Social Security would empower individuals to have control over their own retirement investment decisions, taking the US government out of citizens' financial retirement decisions.

  13. Social Security was established at a time when people had a shorter life expectancy. The only viable option for a population that is living longer is to put Social Security into personal investment accounts.

  14. The present Social Security system fails workers who have a disproportionately shorter life expectancy rate since they cannot collect on benefits paid. Personal accounts will provide the option to bequeath assets to heirs upon death, an option currently missing from Social Security.
CON Privatized Social Security
  1. Moving Social Security into private accounts would cause substantial reductions in traditional Social Security benefits. Privatization would, over the next 47 years, reduce benefit levels by as much as 44% below 2005 levels. [6]

  2. Getting a privatization system started is too costly. The transition costs of setting up new personal accounts while continuing to provide benefits to Social Security's current beneficiaries would require an extra $1 trillion to $2 trillion. [7]

  3. Private accounts would reduce special insurance protections, such as disability and survivor's insurance, that are also provided by Social Security. Cuts will have to be made to these programs in order to fund private retirement accounts.

  4. Privatizing Social Security, which essentially is putting peoples' retirement money at the whim of the stock market, will weaken the federal retirement system through potentially risky investments.

  5. Putting their Social Security funds into private investing accounts exposes US workers to be victims of unscrupulous stock brokers and of their own investment choices.

  6. Many people either do not know, or do not want to know, how to make the sound decisions about their own long-term investments that private accounts require.

  7. The upfront costs of setting up the individual accounts and of advising individuals of the system would take away any fiscal benefits that moving toward privatization could bring.

  8. Social Security is a program that provides benefits through one, centralized process dictated by the US government. Moving benefits into individual private accounts creates a decentralized system that will have to take into account the millions of diverse opinions, preferences, and expectations of individual investors, making the program too bureaucratic and unwieldy.

  9. Privatization of federal retirement benefits has proved disappointing in other countries. Private retirement accounts in the UK that started in 1988 have had management fees and marketing costs eat up an average of 43% of the return on their investments. [7]

  10. Putting money from Social Security into private accounts means moving retirement savings from a simple, easy to comprehend system into a complex structure of investment portfolios and stock market shares that is more difficult to understand.

  11. Invested private Social Security accounts will not benefit the US economy but will put billions of dollars in brokerage and management fees into the pockets of Wall Street financial services corporations.

  12. Instead of upsetting the system through a new plan like privatization, future budget shortfalls can be fixed within the system. The current system will work by reducing benefits, increasing taxes, and/or raising the retirement age.

  13. Social Security paid benefits to over 39 million retired workers in 2008. Creating and managing this many individual private retirement accounts would generate more, not less, bureaucracy. This enterprise would require costly hiring and training tens of thousands of new government employees. [8] [9]

  14. Because private accounts would be financed by taking money out of Social Security, privatization would increase Social Security's funding gap and move forward the date of the system's insolvency up from 2037 up to 2030.

  15. Social Security taxes are weighted to balance the system for all levels of wage earners. Private accounts will create disproportionate returns since higher-wage will have more money to take bigger risks for higher yield investments than can low- and moderate-income workers.
Comment Comment
Background: "Should Social Security Be Privatized?"
Chart detailing how Social Security works.
(Click to enlarge image)
Chart detailing how Social Security works.
Source: "Social Security - A Simple Concept," www.pbs.org (accessed Nov. 9, 2009)
The US Social Security program is intended to provide a safety net protecting American workers and their families in the event of retirement, disability, and early death. Moving Social Security benefits into private accounts is one proposal to prevent Social Security's predicted future financial shortfall. Privatization of Social Security would allow workers to control their own retirement money through personal investment accounts.

Supporters of private accounts contend that retirees would have the freedom to invest their retirement money in the stock market as they wish, theoretically earning higher returns than with government-invested funds.

Critics of privatizing Social Security argue that investing retirement money is complicated and risky because individuals can lose their retirement safety net through bad decisions.

Social Security was created when Franklin D. Roosevelt signed the Social Security Act on Aug. 14, 1935 to provide a social insurance system based on the idea that, if workers pool a portion of their wages, they would be able to protect each other and their families against catastrophic wage loss due to death, disability or retirement. Through this national benefits program, Social Security makes available a basic level of monthly income to those workers who have paid into the system. Of 2009 Social Security benefits, 69% was for retired workers and their dependents, 18% was for disabled workers and their dependents, and 13% was for the survivors of deceased workers. [10]

Chart of the estimated decline of workers per beneficiary from 5.1 in 1960 to 2.1 in 2035.
(Click to enlarge image)
Chart of the estimated decline of workers per beneficiary from 5.1 in 1960 to 2.1 in 2035.
Source: "The Future of Social Security," www.ssa.gov, Aug. 2009
Although Social Security benefits are intended to complement pensions and personal savings for retirees, Social Security payments have become a de facto retirement plan for many Americans. Among elderly beneficiaries, 20% of married couples and about 41% of unmarried persons relied on Social Security for 90% or more of their income in 2009. [10]

It has become the largest government program in the world and the single greatest expenditure, at 20.8% ($612 billion) of the 2008 $2.9 trillion federal budget. [15] In 2008, the Social Security Administration paid $615 billion, or 4.3% of the US GDP, in benefits to about 56 million people. [1]

Workers pay into the Social Security system and receive benefits when they become eligible. Social Security does not maintain individual savings accounts per worker, but operates as a pay-as-you-go system in which each generation of workers supports the preceding generation's retirees. As of Nov. 24, 2009, 6.2% of US citizens' salaries is taken out in Social Security Federal Insurance Contribution Act (FICA) taxes. Individuals can begin collecting reduced retirement benefits as early as age 62, and full retirement benefits can be claimed at 67 years old.

Political cartoon on Social Security reform in the United States.
(Click to enlarge image)
Political cartoon on Social Security reform in the United States.
Source: Mike Luckovich, "Times A-Waisting," available on www.honnold.net, Mar. 13, 2005
Social Security has had financial difficulty in the past. Budget shortfalls in the 1980s prompted an adjustment to the system with comprehensive changes in the Social Security coverage, financing, and benefit structure. For example, in an effort to generate revenue a 1983 Social Security Amendment included a tax on benefits for the first time- 50% of Social Security benefits became subject to taxation for individuals with an income of $20,000 or more- and raised the full-benefit retirement age from 65 to 67. [11] However, because many American voters consider Social Security benefits to be a right, it has consistently been a federal program that politicians are reluctant to change.

According to the 2009 annual report of the Social Security Board of Trustees, the program faces a budget shortfall of more than $15 trillion over the next 75 years. [16] They predict that Social Security's cost will exceed tax revenues beginning in 2016 and will become insolvent, i.e. unable to pay scheduled benefits in full, when reserves become exhausted in 2037. Insolvency does not mean the Social Security fund will be completely broke and unable to pay benefits. Starting in 2037, the program is expected to pay benefits, not out of reserved funds as is currently the case, but out of incoming FICA taxes. In that year, Social Security is projected to have only enough tax income to pay about 76% of scheduled benefits. [12]

Social Security poster, circa 1935.
(Click to enlarge image)
Social Security poster, circa 1935.
Source: "Photos of the Great Depression and the New Deal," docs.fdrlibrary.marist.edu (accessed Oct. 22, 2009)
When Social Security trust funds are projected to become insolvent in 2037, the benefit cuts and tax increases required to achieve long-range solvency are estimated to be about twice as large as those needed in 2007. [13] An early indication of Social Security's financial distress is that, in 2010, more than 57 million Americans will not automatically receive a Cost-of-Living Adjustment (COLA) in their benefits. [17] It was the first year without an automatic increase since COLA was added to Social Security benefits in 1975.

Several factors contribute to Social Security's predicted long-term insolvency. Over 40 million post-World-War II baby boomers will reach the retirement age of 65 between 2010 and 2040 in what has been called America's "silver tsunami." By 2030, almost one in every five Americans will be 65 or older and, by 2040, there will be twice as many people aged 65 and older as there will be in 2010- from 40.2 million (13% of the population) to 81.2 million (20% of the population). [2][14]

Given the aging population, the share of the workforce is declining relative to the share of the population that is retiring, which may contribute to Social Security unsustainability over the next several decades. In 2009, there was an 83-year life expectancy for Social Security recipients versus 77.5 years when the program began in 1935. [1][2] Life expectancy will likely continue to increase and retirees will collect more benefits over a longer time period.

Washington Post-ABC News poll showing results of how confident people are that Social Security will be able to pay full benefits throughout retirement.
(Click to enlarge image)
Washington Post-ABC News poll showing results of how confident people are that Social Security will be able to pay full benefits throughout retirement.
Source: "Washington Post-ABC News Poll," www.washingtonpost.com, Feb. 19-22, 2009
Although the Social Security Act entitles workers to receive benefits, these benefits are not guaranteed by law. The federal government does not have a legal liability to pay retirees the money they paid into the system over their working careers and Congress can change the rules regarding benefit eligibility at any time. Therefore, workers paying into the Social Security system do not have any contractual right to Social Security benefits. [18]

Individual private accounts have been proposed to alleviate future fiscal shortfalls for retiring Americans. While there are many ways privatization can occur, at the basic level these personal accounts would be retirement investment accounts, similar to IRA or 401(k) plans, financed from a worker's Social Security taxes.

Anti-privatizing Social Security protestors in San Francisco, CA.
(Click to enlarge image)
Anti-privatizing Social Security protestors in San Francisco, CA.
Source: "Don't Privatize Social Security," happening-here.blogspot.com, Mar. 31, 2005
Factors indicating that the Social Security program will not be financially sustainable under the present statutory scheme have fueled the current debate regarding Social Security reform. While the majority of people and politicians agree that reform is necessary, a debate rages over whether a plan for private accounts for individuals is the right answer to what appears to be the inevitable insolvency of Social Security retirement funds.

Proponents of privatization contend that personal accounts are fundamental to Social Security reform. They argue that private investment would not only provide a higher rate of return, but would also impart a sense of ownership and control over one's retirement money.

Opponents of privatization believe that investing retirement money in personal accounts is a bad idea. Among other things, critics suggest that future returns to equity investment are likely to be far below historical rates of return and that the risk and administrative costs of those investments will outweigh any benefits.

Video Gallery

President Franklin D. Roosevelt signs and comments on the Social Security Act on Aug. 14, 1935.
Source: "Franklin Roosevelt Social Security," youtube.com (accessed June 6, 2014)
PBS News Hour report on the US Social Security program, including a discussion with David John of the Heritage Foundation and Henry Aaron of the Brookings Institution, hosted by Ray Suarez.
Source: PBS NewsHour, "How Severe Are Problems with Social Security?," youtube.com, Sep. 28, 2011
Newt Gingrich, former Speaker of the US House of Representatives (R-GA), explains his support of personal social security savings accounts in a campaign video for the 2012 Republican presidential nomination.
Source: Newt Gingrich, "Right to Choose Personal Social Security Accounts," youtube.com (accessed June 6, 2014)
President Barack Obama opposes the privatization of social security in his Aug. 14, 2010 weekly address.
Source: The White House, "Weekly Address: Honoring Social Security, Not Privatizing It," youtube.com, Aug. 14, 2010

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