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The Privatization of Social Security Essay

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The Privatization of Social Security

Many people don’t understand how the Social Security system really
works. There are no separate Social Security "accounts" set up for each
taxpayer to which he contributes his Social Security "tax" each year. Many
people believe these accounts exist, that the money they pay into their
accounts grows each year until retirement, and when they retire they get
back what they paid in with interest. This is not true. Most people are
unaware of the fact that our current Social Security system is a
"pay-as-you-go" program, which means that the revenue the federal
government raises each tax year for Social Security benefits is paid out
that same year to beneficiaries.

Many economists believe that our Social Security system is in need of a
major overhaul if today's workers are to receive future benefits.

Thomas R. Saving, Director of the Private Enterprise Research Center at
Texas A&M University says, "What is wrong is that the Social Security
system was never set up to be a sound investment-based retirement system."

Karl Borden, professor of financial economics at the University of
Nebraska recently wrote, "Social Security is an unfunded pay-as-you-go
system, fundamentally flawed and analogous in design to illegal pyramid
schemes. Government accounting creates the illusion of a trust fund, but,
in fact, excess receipts are spent immediately."

Robert M. Ball, former commissioner of Social Security said, "Some of
the trust fund money should be put into the stock market. I want to do it
to get a better return for the Social Security system. Historically,
long-term government bonds have had a real return, after inflation, of 2.3
percent a year, compared with 6.3 percent for stocks."

Paul W. Boltz, economist for the T. Rowe Price mutual fund said, "When
we examine the pending financial crisis of our Social Security system, we
find, in effect, the characteristics of a government sponsored Ponzi-type
scheme."

Michael H. Cosgrove, of the Dallas-based newsletter, The Econoclast
says, "People need to take the responsibility of investing their own funds
for their retirement. The Social Security system assumes people can't make
that decision and government can do it better. The result is a bankrupt
Social Security System."

These economists believe that by investing ...


... middle of paper ...


...oss would have to be made up either by hiking taxes, increasing
borrowing or drastically cutting benefits to current retirees. The
present Social Security system faces a long-term shortfall of between 1
percent and 4 percent of total payroll, depending on your projections of
future economic growth. But the existing pay-as-you-go system could be
rendered solvent by a judicious combination of increasing the retirement
age by two or three years and slightly
raising taxes.

Also there is the question of whether to privatize the whole system, or
whether to add a second tier. We might keep the basic system but
supplement it with self-directed IRA-like funds. The basic tier would be
redistributive and pay-as-you-go. The supplementary layer would be private
and based on individual contributions.

A further question is who bears the risk when investments go sour.
There is no such risk under the current system. The stock market looks
like a great retirement vehicle in the 1990’s, but it wasn't so reliable
in the 1970s and 1930s. The program was deliberately designed as a social
guarantee of retirement income, not a system of government-mandated
private savings.


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