Social Security Privatization: Pros and Cons

Sep 20th, 2010 | By | Category: Social Security & Medicare

The Social Security privatization issue is now becoming a hot political potato.  Depending upon who you read and believe, Social Security could begin to pay out more than is paid in by 2016.  The program is projected to become insolvent in about 2037, if no changes are made in the present system.  Clearly some changes need to be made.  But
what needs to be changed and how those changes are defined is anything but easy.  And in the mid-term election process, those bidding for seats in Congress are throwing around all kinds of innuendo, distortions and outright lies.  They are attempting to scare us senior citizens… again.  So let’s look at reality and keep their fear-mongering tactics at bay:

  • privatizing Social Security means putting retirement money in the hands of workers to invest in private retirement accounts;
  • supporters of private accounts contend that retirees will then have the freedom to invest their retirement money in the stock market as they wish, theoretically earning higher returns than with government-invested funds;
  • critics of privatizing Social Security argue that investing retirement money is complicated and risky because individuals can lose their retirement safety net through bad decisions;
  • using the existing system to avert the pending collapse of Social Security will require deep cuts in benefits, heavy borrowing, or substantial tax hikes; supporters say a better solution is to switch to private investment accounts that will be funded with existing payroll tax thereby avoiding any benefit cuts or tax hikes;
  • but critics respond to that by saying the cost of switching to a private system would exceed one trillion dollars;

…and on it goes.  All of the above points are valid; and there are others that are equally important to review.  SCJ found a good, non-partisan website that outlines the pros and cons of privatizing Social Security.  No fear-mongering; just information given in a non-partisan fashion. 

It seems to us that the issue boils down to this:  Social Security is an entitlement program and Congress can change the rules regarding benefit eligibility at any time; workers paying into the Social Security system do not have a right to receive Social Security benefits.  If the system were privatized, workers would have control over their personal investments, and would have a ‘right’ to receive the benefits from their investments.  However, if they make poor investments or the stock market goes south… again… or unscrupulous investment advisors take advantage of the vulnerability inherent in being a senior citizen, retirees stand to lose everything they have, and end up being relegated to a remaining lifetime of poverty–which is what Social Security was created to alleviate.

Thoughtful discussion, without resorting to fear-mongering tactics, is necessary to address this complicated issue.

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  1. Here’s one of the PRO talking points from
    “When Social Security began in 1935, the contributions of 17 workers paid for the benefits of one retiree. In 2035 the estimated ratio will be 2.1 workers per beneficiary. Allowing individuals to contribute to their own private accounts may reduce future loss of money from fewer worker contributions.”
    It may also increase the loss of money from fewer workers. Poor investment choices and distributions during market declines is a great possibility
    Another quote: “Putting Social Security into private accounts does not expose retirement money to risk. These federally regulated personal accounts would allow individuals to invest only in diversified, approved mutual funds and not in single stocks or highly volatile stocks.”
    Diversification can reduce risk, not eliminate it. The average investor typically switches between asset classes (from stocks to bonds, for example) at precisely the wrong time. When stocks decline, they stampede towards “safe” bond funds – as the equity markets improve and interest rates increase – they react by dumping depressed bond funds and buying expensive stocks.

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