Privatization Of Social Security
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Privatization of Social Security
The Social Security system is a hot topic with todays whos who in politics. Every administration for over 30 years has concurred that Social Security in its current form will not survive; however, is privatization the solution to this ailing system? I believe that this is a great opportunity for individuals to take their retirement future into their own hands and secure it personally.
To fully understand what needs to be fixed we must first understand what it is; Social Security or Old-Age and Disability Insurance, which is its official name, was created in 1935 to financially assist retirees and disabled individuals. It was developed as an earned insurance benefit that would be paid for by all working Americans and their employers. The system was set-up as a pay as you go program, allowing current workers to pay for current retirees. The benefits would be accrued based on your lifetime salary and would then be dispensed to the individual monthly during their retirement; the plan would also fluctuate, depending on budget and inflation. An individual is eligible for SS benefits if they have contributed to the plan for 40 quarters or 10 years and is at least the age of 65 or declared disabled. A spouse or dependent
minor is entitled to survivorship benefits if an individual passes away. “Currently workers pay a 12.4% Social Security payroll tax (FICA) on all wages up to $87,900.00” (FAQ on Social Security, 2005). At this time the system has more income than expenditures, creating a surplus. This additional income is placed in a trust fund that invests the money into non-tradable government bond, which accrues interest at the rate of 6%. Overall the system provides a 2% return on all investments.
Now that we fully understand what Social Securtiy is, we can begin to understand what is wrong. With the current system being a pay as you go program, the workers of today pay for todays retirees. In 1935 when the system was created, there were forty workers for each retiree; in 1950 sixteen workers paid for one retiree, and today only three workers pay for retirees. It is estimated that that in the year 2040 only two workers will pay for each retiree. The major problem facing this program is that every year less and less income is brought in and according to a release posted on the Social Security Trustees website:
Social Security will take in more than it will pay until 2018. Between 2018 and 2028, interest income earned on the trust fund assets is forecasted to make up the difference between income and expenditures. After 2028, Social Security is expected to draw on its trust funds to pay for the expenditures that are not covered by the income. Finally, in 2042 the trust fund surplus is expected to be depleted, and annual revenue into the program is projected to be less than expenditures; however, the trustees project that Social Security will still be able to pay between two thirds and three-quarters of its promised benefits from 2043 to 2080, the farthest date they project. (Social Security: Questions and Answers, June 27, 2004)
There is much debate going on currently about when Social Security will actually go bankrupt, but there is one thing that we do know, it will happen. An important note to add is that the Baby Boomer will begin to retire in 2008, which will exasperate the situation. With all this information President Bush, a representative of the Republican Party, called for an open and candid review of the current systems asking all financial and political figures to come up with any ways to reform the old system.
Under the current Bush administration a new plan for Social Security has been proposed and its formally known as Strengthening Social Security for the 21st Century, but most of us know it as the Privatization of Social Security. This plan suggests that in time all workers would be able to redirect their social security taxes into several different low-cost, broad-based investment funds. These personal accounts are completely voluntary and give individuals a sense of ownership and control. This system is set-up like the federal employee retirement program known as the Thrift Savings Plan (TSP). “The TSP is a voluntary retirement savings plan that is offered to federal employees, including Congress” (Strengthening Social Security, February 2005); this system is similar to a 401 K which includes the pre-tax contributions benefit. There are five primary broad-based investment funds in the program. Below are generic descriptions and a 10 year compound annual rate of return.
Stable Value Fund-invested in US Treasury securities (G Fund)
6.04%
Index Funds-Comprising of investment grade funds
(F Fund)
6.95%
Small to Mid Cap-Index Fund (S Fund)
9.70%
Large Cap-Stock Index Fund (C Fund)
10.99%
International Stock- Index fund (I Fund)
4.32%
Individuals would have the chance to diversify their plan as they see fit, depending on their personal retirement requirements. One special not is that if a worker joins the privatized account but enjoys the benefits of the old system he/she may invest the money in government bonds as it is set up now. The system does not all individuals to move funds back and forth from personal accounts to the traditional system. It also does not allow workers to take out loans from their retirement accounts; they are locked and can not be touched even if the individual decides not to participate. The money invested at that point will remain in its place and continue to accrue interest. The personal accounts offer a “lifecycle portfolio” (Strengthening Social Security, February 2005) that automatically diversifies the investments according to the participants age, generally 47, so as a participant reaches retirement his/her investments may transfer from a high risk investment to a more secure one. High risk investments provide a greater return but have a higher risk of failure. These types of funds should be utilized by younger investors