The current Social Security program will become insolvent by 2034, so a better system is urgently required. Due to an aging population and lower birthrate, the ratio of workers to retirees is shrinking, thereby reducing the funds available for future retirees. In 1940, the payroll tax contributions of 159 workers paid for the benefits of one recipient. In 2013 the estimated ratio was 2.8 workers to each recipient. Since 2010, Social Security has been paying out more in benefits than it receives in worker contributions. According to the 2015 Social Security Trustees' report, the trust funds will run out of money by 2034. Using the existing system to avert the pending collapse of Social Security would require deep cuts in benefits, heavy borrowing, or substantial tax hikes. A better solution is to switch to private retirement accounts that would be funded with existing payroll taxes. The CATO Institute's Project on Social Security stated that moving to personal retirement accounts can "reduce Social Security's debt and bring the system back into solvency."
With personal accounts, retirees will see higher returns on their investment. The year-over-year growth rate for private investments (6.38% average real returns on investments in the S&P 500 between 1984-2014) is much higher than the return gained by retired workers in the current Social Security program (between 2.67% and 3.91% return on the contributions made by a medium income, two-earner couple as of Dec. 2014). Martin Feldstein, Chairman of the Council of Economic Advisers during the Reagan presidency, wrote that with a private account earning a modest 5.5% real rate of return, "someone with $50,000 of real annual earnings during his working years could accumulate enough to fund an annual payout of about $22,000 after age 67, essentially doubling the current Social Security benefit." Privatizing Social Security will put more money in the pockets of retirees.
Private accounts give individuals control over their retirement decisions. Americans are capable of making their own decisions regarding how their retirement contributions are invested. Peter Ferrara, former Director of the International Center for Law and Economics, stated that private accounts "would allow workers personal ownership and control over their retirement funds and broader freedom of choice," and if the accounts were optional (as they were in President George W. Bush's plan) they "would also be free to choose whether to exercise the personal account option or stay entirely in the old Social Security framework."
Individual investment accounts would boost economic growth by injecting money back into America's financial system. Peter Ferrara, former Director of the International Center for Law and Economics, stated that "The reduced tax burden and higher savings and investment resulting from personal accounts would substantially boost economic growth. This would result in more jobs, better jobs, and higher wages and overall income." In the decades following Chile's privatization of its pension system in 1981, the savings accounts that were established generated the equivalent of about 40% of GNP, and Chile's annual growth rate rose to above 7%, double the country's historic growth rate, according to José Piñera, Chile's former Secretary of Labor and Social Security.
Privatization reduces government workforce, red tape, and wasteful spending. Minimizing the requirement of the federal government to provide retirement benefits reduces the bloated bureaucracy of the US government. The Social Security Administration currently employs almost 60,000 people at more than 1,400 offices around the country, with an operating budget of $12.5 billion (for financial year 2016). In 2014, about 26% of US federal spending, or $906 billion, went toward Social Security. If retirement benefits were managed by private companies, government bureaucracy would be greatly reduced.
Being able to invest in one's own private retirement account removes the uncertainty that accompanies the current, government-controlled program. According to a 2010 Gallup poll, 60% of currently working adults assume they will not receive Social Security benefits when they retire. With private accounts, individuals will be paying into a fund that they control, instead of a government-controlled trust fund that may run out of money before they ever receive the benefits they’ve earned. Edward P. Lazear, PhD, Chairman of the President's Council of Economic Advisers during the George W. Bush presidency, stated that "private accounts enhance, rather than reduce, the likelihood that contributors will receive what they expect. Benefits are more, not less, secure with private accounts" because while the government could succumb to pressure to reduce benefits or change the age of eligibility at any time, returns on, for example, US Treasury bonds "will be paid with virtual certainty."
Private retirement accounts give workers the contractual right 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 for being a member of the Communist Party. Michael Tanner, Senior Fellow at the Cato Institute, stated that "under a privatized Social Security system, workers would have full property rights in their retirement accounts. They would own the money in them, the same way people own their IRAs or 401(k) plans. Congress would have no right to touch that money."
A system using private accounts would be restricted to allow only low-risk investments so returns would be assured. Converting Social Security into private accounts does not mean workers would be free to put their contributions into high-risk ventures. People would not be allowed to invest their Social Security savings in individual stocks or other highly volatile investments. President George W. Bush's 2005 plan would only have allowed relatively low risk investments such as "a conservative mix of bonds and stock funds."
Social Security taxes have become excessive. The maximum Social Security tax instituted by the Social Security Act of 1935 was $60; as of 2015 it is $7,347 for employees and employers – which is over 700% higher than inflation. The Social Security tax rate has risen from 2% to 6%, and is as high as 12% for the self-employed. The amount of income that is subject to payroll tax has climbed from $3,000 in 1935 to $118,500 in 2015. Rather than having so much of their earnings be taken by the government in the form of high Social Security taxes, money put into private accounts would remain under each worker's control.
Private accounts would allow benefits to be inherited. The present system is inequitable because people who live shorter lives collect less of their earned benefits and yet those benefits cannot be transferred to family members. Personal accounts will provide the option to bequeath assets to heirs upon death, an option currently missing from Social Security. As President George W. Bush stated in his 2005 State of the Union speech, "you'll be able to pass along the money that accumulates in your personal account, if you wish, to your children or grandchildren." Michael Tanner, Senior Fellow at the Cato Institute, stated that privatizing Social Security would be a "big boost for the poor" because of inheritable benefits.
Private accounts cannot be raided by Congress or the President. In the past, budget surpluses in Social Security were used by the federal government to fund other government spending, including the purchase of Treasury bonds to offset budget deficits. Money kept in private accounts is under each individual beneficiary's control so it cannot be diverted for non-Social Security purposes.
Private accounts benefit the poor and minorities. In the current system, groups of people with shorter life expectancies (such as the poor and African Americans, for example) effectively have their income transferred to people with longer life expectancies because the latter can collect their benefits for longer. As stated by President George W. Bush, "Personal accounts, which could be passed along to the next generation, would go a long way toward reducing that disparity."
Privatizing Social Security would do nothing to solve its impending insolvency, and would actually make it worse. The trust funds are destined for insolvency because the program's cost is increasing at a faster rate than revenue from payroll taxes. The situation will get even worse if a portion of each individual's payroll taxes is diverted away from the Social Security trust funds and into individually controlled retirement accounts, shrinking the funding source for future retirees' benefits. According to a 1997 Brookings Institution analysis, if just 1% of payroll taxes had been diverted to private accounts in 1998, the trust funds would have been insolvent by 2015. William A. Galston, Senior Fellow at the Brookings Institution, said about President George W. Bush's 2005 privatization proposal that "it was not clear how private accounts were even part of the solution. At best, they would function alongside of, and in addition to, needed fiscal reforms; at worst... they would exacerbate the system's fiscal woes."
Private Social Security accounts will undermine the guaranteed retirement income provided by Social Security by putting peoples' retirement money at the whim of the stock market. During the 2008 financial crisis, the three main stock market indexes all dropped precipitously: the Dow Jones Industrial Average fell by 33.8%, the S&P 500 dropped by 38.5%, and the NASDAQ fell 40.5%. Due to the "boom and bust" cycles of the market, those who retire during an economic downturn would be significantly worse off than those who retire during a boom. Even diversified mutual and bond funds carry significant risk and are not guaranteed or insured by the government.
Many people lack the basic financial literacy to make wise investment decisions on their own. A 2015 survey published in USA Today revealed that only 39% of Americans know the annual percentage rate (APR) on their primary credit card, and almost 45% don't know what a credit score evaluates. According to researchers Annamaria Lusardi and Olivia S. Mitchell of Dartmouth College, financial illiteracy is widespread among older Americans. In their Oct. 2009 study on financial literacy among adults over 50, Lusardi and Mitchell found that only half of the participants could answer two simple questions on compound interest and inflation.
Privatizing Social Security would dramatically increase the national debt. Transitioning to private accounts while continuing to provide benefits to current Social Security beneficiaries would leave a multi-trillion dollar hole that would need to be filled by more government spending. According to Bloomberg Business, President Bush's plan would have required "Washington to borrow at least $160 billion a year in the early years," increasing the nation's debt by 40%. MIT economist Peter A. Diamond estimates that the costs incurred during the transfer to private accounts would add $1 trillion to $2 trillion to the country's national debt, which "could trigger an economic crisis."
Privatizing Social Security would expand, not reduce, government bureaucracy. In 2014, Social Security paid benefits to 42 million retired workers and their dependents. Creating and tracking this many individual private retirement accounts would generate more government bureaucracy and would require the hiring and training of tens of thousands of new government workers to oversee accounts and explain the system to millions of people. The administrative costs of the current system were less than 1% of total revenues in 2014.
Guaranteed benefits would be reduced significantly under a privatized system. In order to fund private retirement accounts, special insurance protections that are provided by Social Security, such as disability and survivor's insurance, would need to be reduced. A 2005 Century Foundation analysis of the Bush Administration's privatization proposal demonstrated that the diversion of payroll taxes to private accounts would reduce benefit levels by 44% below their 2005 levels by 2052. Economist Dean Baker estimated that an average 15-year-old in 2005 who retires in 2055 stands to lose more than $160,000 of his scheduled benefits under Bush's plan, and gain less than a third of that loss back from his investment in a private account.
If workers had to adopt private accounts, unscrupulous financial advisors could take advantage of novice investors. According to the FBI, there were 1,846 cases of securities and commodities fraud pending as of 2011, and some of the schemes defrauded several thousand investors each. Many of the victims were elderly investors. The Obama Administration's Council of Economic Advisors estimated that Americans lose about $17 billion per year on retirement investments that are arranged to benefit financial advisors at the expense of investors. After the United Kingdom introduced private accounts in the 1980s, unscrupulous salespeople advised millions of people to invest in risky personal pensions dependent on stock market returns. As a result of the losses incurred, the UK government had to pay out more than £13 billion (equivalent to about US$20 billion as of Aug. 2015) in compensation to the victims.
Privatizing Social Security will put billions of dollars into the pockets of Wall Street financial services corporations in the form of brokerage and management fees. Private Social Security accounts will be a boon to Wall Street, where banks and investment advisors could receive over $100 in fees for each account. Since the number of Social Security beneficiaries is expected to grow to more than 125.7 million by 2090, Wall Street will have guaranteed access to a rapidly growing pool of customers courtesy of the federal government.
Social Security is highly efficient in comparison with private accounts. Social Security provides benefits through a centralized, highly efficient process administered directly by the US government, with an administrative overhead of less than 1%. Moving benefits into individual private accounts creates a decentralized system that will have to take into account the full diversity of opinions, preferences, and expectations of individual investors, which may increase the program's annual administrative costs by more than 83% (from less than 1% to 1.83% of assets), amounting to $54-$117 per worker per year.
Other policy changes can fix Social Security more effectively and less disruptively than privatization. Future budget shortfalls can be eliminated by reducing benefits, increasing taxes, and/or raising the retirement age. In 2010, the nonpartisan Congressional Budget Office (CBO) estimated that either a 15% cut in benefits or a 2% payroll tax increase could keep the trust funds solvent for an additional 44 years. In addition, the CBO found that eliminating the payroll tax cap ($118,500 as of 2015) would also keep the trust funds solvent for another 44 years. Higher returns could be offered to retirees if Congress allowed the Social Security Trust Funds to invest in equities in addition to bonds.
The accusation that Social Security has been "raided" by the federal government is misleading and does not provide a justification for privatizing the program. When there have been surpluses in the Social Security trust funds, that money has been invested in US government bonds that partially fund the running of the federal government. As Steve Vernon, research scholar with the Stanford Center on Longevity, explained, "They spent this money on all the various operations of the federal government... When you buy any investment, like a stock or a bond, the entity that issues it usually spends the money you paid for that stock or bond."
Social Security is an equalizer, leveling the playing field for rich and poor, whereas private accounts would favor the wealthy. Social Security taxes are weighted to balance the system for all levels of wage earners, while private accounts favor the rich because low-income earners without their own savings would have their retirement funding dependent on the success of the markets. Both the General Accounting Office and the Social Security Administration examined a private accounts system established in three Texas counties, and both organizations "concluded that lower-wage workers, particularly those with many dependents, would fare better under Social Security, while middle- and higher-wage workers were likely to fare better [under a privatized system], at least initially," according to the Texas Tribune.