Privatization of Social Security


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Privatization of Social Security

Defenders of Social Security point out that without it, nearly four million more older Americans
would have been counted as poor during 1997. But analysts say that living above the official
poverty income level in retirement years is not all that difficult even for those with low incomes
during their working years. All an elderly person had to earn in 1997 to be above the poverty
threshold for persons 65 or older was $7,698. To receive that amount of income, all an elderly
person had to have at age 67 is $192,450 in government bonds assuming current interest rates
and that the individual's net worth is protected from the erosion of inflation. To achieve that
sum, all a person had to saveand invest from age 22 was an average of $347 a year -- ranging
from $195 beginning 45 years ago to $498 last year. This means that even low-skilled, minimum
wage workers would have to save only 4.6 percent of their incomes. Workers earning the median
American wage would have to save less than 2 percent of their income -- equivalent to nine
minutes' work a day. The problem is that the typical elderly person only had about $106,000 in
net worth in 1996, the latest year for which data is available. Without doubt, many of today's
elderly went throughtheir productive years without saving enough, seduced by the prospect that
Social Security would provide amply at retirement.

In a recent report, the U.S. General Accounting Office warned that the long-term prospects for
the Social Security system may be even worse than we think. It is already well-known that once
the baby-boom generation begins to retire in 2010 this will place unprecedented financial
pressure on the system. By 2014, current tax revenues will be insufficient to pay current benefits,
and by 2029 the Social Security Trust Fund will be exhausted. But demographic factors are
accelerating Social Security's problems. Among the reasons:



* Growing life expectancy is increasing the retired population faster than expected. In 1940, a
65-year old man could expect to
live another 12 years. Today he can expect to live another 15 years and by 2040 this will rise
to 17 years.

* The fertility rate is falling faster than expected. In 1960, a typical woman of child-bearing
age gave birth to 3.6 children.
That rate has fallen to just two today and is expected to fall to 1.

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9 by 2020. Since we need a
fertility rate of 2.1 just to replace
the existing population, we are already in a negative population growth position, meaning
fewer future workers.

* As a consequence of these two trends, the elderly are expected to rise from 12 percent of
the population to 20 percent by
2050. The number of retirees will rise from 34 million to 80 million.

* The combination of a smaller working-age population and a larger elderly population
means that there will be fewer workers
to support each retiree. There were more than five workers for each retiree in 1960. Today
there are 3.3. And by 2030 there
will be just two workers to pay all the taxes required to pay the benefits of each retiree.

The problem, of course, is that the Social Security system was never pre-funded the way
private pensions are. It is a
pay-as-you-go system, with each generation of workers paying the benefits of current retirees.
This works fine as long as the
working population grows faster than the retired population. But when the trend reverses, as it
is now doing, the system is
simply unsustainable. It is for this reason that growing numbers of analysts favor moving
Social Security toward a pre-funded
system, by allowing workers to save some of their taxes in a private retirement account.

Although a private Social Security system would be easy enough to set up if we were starting
from scratch, trying to do so
now means that the current generation of workers will, in essence, have to pay twice: first for
their own retirement and again
for current retirees. However, some analysts have suggested that a privatized Social Security
system may provide a way out of
this dilemma by taking advantage of the higher returns available in the stock market. If
workers could get a return on their
Social Security taxes of 10 percent, the historical stock market increase, they could in theory
afford to do both.

Bibliography:
Source: Richard B. McKenzie and Dwight R. Lee
(authors), "Why Some of the Elderly Are Poor,"
Investor's Business Daily, June 25, 1999.


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