Should Social Security Be Privatized

Should Social Security be Privatized?

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 in the private market,

someone currently entering the labor force and retiring at age 65 can

expect to receive an inflation adjusted retirement benefit from 1.5 to 5.5

times the current social security benefit.

Increasing life expectancy and decreasing birth rates have combined to

create the crisis the system is now facing. For example, in 1950 there

were 16 workers for every social security retiree, while presently there

are only 3.3 workers for every retired worker drawing benefits. Estimates

are that by 2030 there will be fewer than two workers for every retiree.

Privatizing social security sounds extreme, but it has been done

successfully in other countries like Chile. Jose Pinera, who was Chile's

minister of labor, privatized the state pension system in 1981. It is now

giving retirees generous pensions while fueling investment, growth and

improving living standards in that country.

The heart of the Chilean system is a mandatory savings plan. All

workers under age 45 contribute 10 percent of their monthly earnings in

special accounts, known as AFPs (Administradoras de Fondos de Pensiones).

Workers between ages 45 and 65 could shift to the new system at their

option. The funds in AFPs are professionally managed and invested in

stocks and bonds. The money may not be touched until retirement, at which

time the worker may begin phased withdrawals or purchase an annuity. At

the end of 1995 more than $25 billion was invested in AFP accounts. The

old Social Security system is being phased out. By 2030 Chile's Social

security will entirely be privatized.

This system ensures the money a taxpayer pays for retirement goes to

helping that taxpayer retire (not others). It ensures the money paid in

taxes is invested and grows. It also gives taxpayers