Social Security accounted for 23% ($1 trillion) of total US federal spending in 2019. Since 2010, the Social Security trust fund has been paying out more in benefits than it collects in employee taxes, and is projected to run out of money by 2035. One proposal to replace the current government-administered system is the partial privatization of Social Security, which would allow workers to manage their own retirement funds through personal investment accounts.
Proponents of privatization say that workers should have the freedom to control their own retirement investments, that private accounts will give retirees higher returns than the current system can offer, and that privatization may help to restore the system’s solvency.
Opponents of privatization say that retirees could lose their incomes in a stock market downturn, that many individuals lack the knowledge to make wise investment decisions, and that privatization does nothing to address the program’s approaching insolvency.
History and Structure of Social Security
President Franklin D. Roosevelt signed the Social Security Act on Aug. 14, 1935, creating the Social Security program. The program provided a social insurance system based on the idea that if workers pooled a portion of their wages, they would be able to protect each other and their families against wage loss due to retirement. Through this national benefits program, Social Security made available a basic level of monthly income to workers who paid into the system.
Although benefits were initially restricted to workers aged 65 years and older, the program expanded over time and is now also known as the Old-Age, Survivors, and Disability Insurance program (OASDI). In 1939, benefits were introduced for spouses and minor children of retired workers, and “survivors benefits” could be paid to the family of a worker who died prematurely. Benefits for disabled workers were added in 1956, and the minimum age at which workers became eligible for old-age insurance payments was lowered to 62 for women in 1956 and for men in 1961.
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.
Social Security benefits were initially intended to supplement pensions and personal savings for retirees, however, Social Security payments have become the primary retirement plan for many Americans. The percentage of American workers with employer-funded defined benefit pension plans declined from 39% in 1980 to 20% in 2007.
By 2014, 22% of married retirees and about 47% of unmarried retirees relied on Social Security for 90% or more of their income. About 59 million people were receiving Social Security benefits at the end of 2014: 42 million retired workers and their dependents, 11 million disabled workers and their dependents, and six million surviving relatives of deceased workers.
Social Security does not maintain individual savings accounts for each worker, but operates as a pay-as-you-go system in which each generation of workers supports the preceding generation’s retirees. In 2015, US citizens had 6.2% of their earnings (up to $118,500) taken out as Social Security Federal Insurance Contribution Act (FICA) taxes, which are commonly referred to as payroll taxes. Employers paid 6.2% of each employee’s earnings (up to $118,500) in payroll taxes. Individuals can begin collecting reduced retirement benefits at age 62, and full retirement benefits can be claimed at the age of 67.
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.
About 65 million people were receiving Social Security benefits at the end of 2020: 46 million retired workers and 3 million of their dependents; 8.2 million disabled workers and 1.5 million of their dependents; and six million surviving relatives of deceased workers. As of Mar. 10, 2021, the withholding rate for social security was 6.2% for the employer and 6.2% for the employee.
Social Security’s Projected Insolvency
According to the 2015 annual report of the Social Security Board of Trustees, the cost of Social Security benefits would exceed tax revenues beginning in 2020, and the program would become insolvent (i.e. unable to pay beneficiaries in full) when reserves become exhausted in 2034. Social Security was projected to have enough tax revenue to pay 79% of benefits owed in 2034. The Trustees predicted a budget shortfall of $10.7 trillion through 2089.
The 2020 Social Security Board of Trustees report indicated that, if no further action is taken, the program will be insolvent by 2035 when the US governments will be able to pay about three quarters of benefits.
Several factors contribute to Social Security’s predicted insolvency, including America’s aging population. Millions of post-World-War II Baby Boomers began reaching retirement age in 2011, in what has been called America’s “silver tsunami” (or “gray tsunami”) By 2030, all Baby Boomers will be over 65 years old, an estimated 73 million people. By 2034, older adults will outnumber those under 18 years old for the first time in US history. In 2010, the estimated life expectancy was 78.7 years, compared to 61.7 years in 1935 when the program began.
Birth rates have fallen from over three children per woman during the baby boom (1946-1965) to 1.7 children per woman in 2019. 2.1 children per woman would be needed to replace the Baby Boomer population. Because of this decline, the ratio of workers to beneficiaries has dropped significantly. In 1940, there were 159.4 workers for each beneficiary, but the ratio fell to 5.1 workers to each beneficiary by 1960, and by 2013 there were only 2.8 workers to each beneficiary.
Brief History of the Privatization Debate in the United States
During the 1990s, US politicians and think tanks began suggesting private investment accounts as one option to prevent the Social Security program’s impending financial difficulties. In Jan. 1997, a report issued by the Advisory Council on Social Security offered three proposals to alter the program in an effort to ensure future solvency. The proposals all involved investing retirement contributions in the stock market. One of the plans envisaged the government investing money from a common pool, but the other two ideas specified the establishment of individual accounts for each worker: one plan proposed publicly-held individual accounts and the other plan suggested private accounts.
A partial privatization of the program using private accounts gained support in the ensuing years, largely from Republican politicians and conservative think tanks but also from some moderate Democrats. While proposals differed, the unifying element was the notion of individual private retirement accounts, with a portion of each individual’s payroll taxes diverted from the trust fund to accounts similar to IRA or 401(k) plans. In late 1997, President Bill Clinton was reportedly in discussions with House Speaker Newt Gingrich (R-GA) to put forward a bipartisan proposal to reform Social Security using private accounts, but the plan never went ahead.
During the 2000 US presidential campaign, Republican nominee George W. Bush ran on the promise of letting “younger workers take a portion of their payroll taxes and put it in the marketplace.” Bush’s Social Security reform proposal won considerable public support, and some commentators gave it partial credit for Bush’s eventual victory over Democratic nominee Al Gore. On May 2, 2001, Bush appointed a commission to examine his proposed changes to Social Security, but his first term was dominated by responses to the 9/11 attacks. Bush again touted personal accounts in his successful 2004 reelection campaign. However, after he was reelected, Bush revised his plan and called for future retirees’ benefits to be reduced by about 40% to prevent the trust fund from becoming insolvent. He also refused to rule out a raise in taxes to support the program’s restructuring. Public support for the proposal dropped, the influential retirees’ organization AARP lobbied against the idea, and Democratic opposition in Congress intensified. By late 2005, the plan had stalled and public discussion about privatization remained relatively dormant for several years.
Public Opinion 2011-2015
In a Sep. 2011 CNN/ORC poll, 52% of adult Americans polled favored the partial privatization of Social Security, with 46% opposed. According to Feb. 2014 polling by Pew Research, 51% of Millennial and 50% of Gen Xers believed Social Security would not be able to provide them with any benefits at all by the time they retire. In a Jan. 2015 Gallup poll, 46% of those polled said they “personally worry about the Social Security system,” which is fairly consistent with polls taken regularly since 2005. An Apr. 2015 Gallup poll found that 36% of US non-retirees expected Social Security to be a “major source” of their retirement income, the highest percentage in 15 years of polling. Gallup also found that the percentage of 18-34 year-olds who expected to rely on Social Security as a “major source” of their retirement income doubled between the 2005-2006 and 2014-2015 periods, from 13% to 26%.
Several 2016 Republican presidential candidates expressed their support for privatizing Social Security with personal accounts, including Rand Paul, Mike Huckabee, Rick Perry, and Ted Cruz. However, the debate in Washington, DC, focused on how to change Social Security’s revenue and benefit structure to avoid insolvency. Some former supporters of private accounts shifted their positions to favor solutions including raising the retirement age, changing the Cost-of-Living Adjustment (COLA) formula, or cutting benefits. Other suggestions included removing the payroll tax cap on high earners, using the revenues to replenish the trust fund and increase the maximum benefit, introducing means-testing so that wealthy retirees would receive reduced or no benefits, and raising Social Security taxes.
After 2017, the debate again went dormant, with politicians and think tanks proposing other ways to resolve, reduce, or eliminate the Social Security program.
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