Social Security Reform

Privatizing Social Security

Social Security was established as a promise to the people of continuation of income into retirement. Well the road to hell is often paved with good intentions, because that promise now has the country in economic uncertainty. The guarantee that workers will be taken care of in their old age if they paid their Social Security tax, is no longer guaranteed. If we don't come to a unanimous decision as to a plan of reform; financially our country is doomed.

Social Security has always struck me as a socialist program. Returning to our capitalist roots is where we will find the solution to this problem. Privatizing Social Security offers solutions to our current problems, and empowers the people with ownership and a voice in their financial future. At first such a plan sounds drastic, but when examined closely is a sound solution. I believe it is important to provide some background to the Social Security crisis, before weighing the solution.

Social Security was established in 1935 offering retirement income to workers in their old age. An alluring idea to a country emerging from the Great Depression. Social Security is based on the taxation of income to generate revenue. Currently Social Security tax is a little more than 12 percent, and is capped at ninety thousand (www.whitehouse.gov). The cap is a ceiling on income tax. So it doesn't matter whether you make ninety thousand or nine hundred thousand you pay the same dollar amount on income tax. The generated revenue is immediately paid out in the form of benefits. Benefits include retirement pensions and disability benefits. Pensions replace a percentage of workers wages once retired. Disability benefits support those unable to work due to physical or mental impairments, or survivors of the deceased that are too young to enter the workforce. This is referred to as a pay as you go system. Meaning every dollar paid into Social Security is immediately paid out. This pay as you go system is based on the assumption that the working population and retirement population increase at parallel rates. Essentially it is assumed that as more people retire more people will be entering the workforce and paying taxes. So the amount paid out as Social Security benefits is assumed to be offset by the steady increase of taxable income. Thus, creating a delicate balance between the workforce and retired.

Social Security revenue is recorded through different trust funds. In recent years the trust funds have run a surplus (taking in more than they pay out). The government has borrowed against this surplus, to pay for other government expenditures in the national budget, each year; and writing itself IOUs. By 2012 the government will have borrowed 3 trillion dollars from the trust funds (www.socialsecurityreform.org). The unexpected surplus is attributed to the entrance of baby boomers into the workforce.

At the end of World War II mass numbers of soldiers were discharged from the military, and looking to start a family to make up for lost time. The population explosion this created is known as "The Baby Boom". When the baby boomers entered the workforce, there were more people working and paying taxes than was needed to cover Social Security benefits. Thus, creating the surplus that we see today. Not all baby boomers had children, and the ones that did had fewer children than previous generations. When the baby boomers are ready to retire; there won't be enough workers to support promised benefits.

In as early as 2012 it is estimated there will only be two workers paying taxes for every one recipient of Social Security benefits. At that time the surpluses generated each year will cease, and Social Security will begin to run a deficit (paying out more than it takes in). The government will then have to begin paying back the money borrowed from the trusts, plus interest. Since no money has been saved for this purpose, the government will be forced to increase the national debt, cut spending, or raise taxes. "Even worse, unless something is done, the entire Social Security system will use up its government IOUs and go bankrupt by 2037" (www.socialsecurityreform.org).

We've known about the approaching Social Security troubles for some time now. Numerous plans of reform have been proposed by Senators Gregg, Moynihan, Kerrey, Representatives Porter, Sanford, Smith, and the Federal Reserve Bank of Cleveland, State Street Bank, the CATO Institute, National Taxpayers Union Foundation, and the Center for Strategic & International Studies, and the Advisory Council of Social Security. Due to politics, no president has touched the issue. Even though we've known about the problems in Social Security, no president has ever attempted reform as it isn't a current problem. Therefore it has never been a priority for those needing votes to stay in office. Now that we are as close as seven years to recalling the IOUs, the issue is rapidly progressing into a crisis. Even if we found a solution to Social Security's inherent flaws, many people are worried it is too late. "One study shows that more people age 18 to 34 believe in UFOs than believe they will ever collect Social Security benefits" (www.socialsecurityreform.org).

President Bush currently has a bill believed to address the problems within Social Security, privatizing. Although there are many versions of a privatized Social Security system, the basic model is a proven solution to our current pension problems. Many countries all over the world have already switched to privatized systems. Chile switched to a privatized system in 1981. Once installed, the new system promoted increases in pensions, income, national savings rates, and provided investment capital for the economy. It also decreased taxes, national debt, and the average age of retirement. The United Kingdom also implemented a partially privatized system in 1978 (wwwncpa.org). Also, Sweden, Singapore, and multiple countries throughout Latin America have experience with privatization of Social Security.

A privatized system isn't as foreign to America as you might think. It would work Similar to the already popular 401ks we are all familiar with. 401ks have succeeded in the private sector for years. In a privatized system tax revenues would be deposited into individual mutual fund accounts and compound interest until a worker retires. Workers would own their pensions and could pass them on to beneficiaries. Workers would also have a choice of a variety of funds to invest in. A portion of tax revenues would be paid as disability insurance, for continued support of the disabled. Another small portion would cover the administrative fees associated with managing the funds.