Introduction
Social Security, established in 1935, accounts for 23% of all federal spending, and thus, it is the largest program in the federal budget (Edwards and Tanner, 2013). The expense on Social Security even exceeds the federal spending on national defense, the second-largest federal program. As per the estimation of the Congressional Budget Office, by 2013, Social Security expenditure will double the amount spent on defense by rising to $1.42 trillion as opposed to $731 billion on defense. The two components of Social Security include Disability Insurance (DI) and Old-Age and Survivors Insurance (OASI). Both DI and OASI are funded primarily by an imposition of 12.4% payroll tax (Edwards and Tanner, 2013). Social Security is the primary source of retirement earnings for the majority Americans. The Social Security system is a pay-as-you-go retirement system funded by taxes. The Social Security system has a lot of financial imbalances. For instance, the program has substantial cash deficit. For instance, in 2012, the program had a cash deficit of whopping $55 billion (Edwards and Tanner, 2013). Discussion of privatizing the Social Security program has been going on for decades as a means to reform the program, but due to the conflict of opinions, no constructive action towards privatization has been undertaken so far. This paper would discuss that it is time for the Social Security program to be reformed through privatization as privatization would enable the workers to gain autonomy on their savings and investment decisions and would also be a more practical approach to retirement under the current economic scenario.
How Privatization Would Run?
Privatization of Social Security would enable the workers to make their retirements saving in direct individually owned private accounts. Workers will be able to withdraw their funds from their accounts when they reach the retirement age or when they become disabled and their heirs will also be able to inherit the funds accumulated in the savings account after the death of the individual before the retirement age or before becoming disabled. When an individual will decide upon receiving a pension, a portion of the funds or the entire of it will be converted into an annuity, which will last until the death of the individual (Bosworth and Burtless, 1997). If the individual is married, both he or she and his or her spouse might need to accept the annuity program of the joint survivors in which the annuity would last until the demise of both the individual and his or her spouse. Under privatization, individuals would be able to withdraw some of the funds as a lump-sum amount after they retire or become disabled.
Difference Between Privatized and the Current Social Security Program
Privatization program differs from the current Social Security system in two different ways. Firstly, the ultimate retirement benefit of an individual would solely depend on the size of his or her contributions and the success of his or her investment plan. Along with other equal benefits, workers with larger contributions will be entitled to receive bigger pensions after retirement. Similarly, workers whose investment plans will draw higher rate of returns would enjoy a larger inflow of money than workers whose investments plans will fall through. Secondly, under privatization, pensions will be paid out to workers out of their accumulated savings, whereas under the current Social Security system, pensions are administered mainly by the payroll taxes of the active workers (Bosworth and Burtless, 1997). This distinction between these two kinds of programs indicates that saving accumulation in a privatized Social Security program would be several times larger than the savings needed in the current pay-as-you-go Social Security program.
Privatization Benefits
Those opposed to Social Security privatization often argue that the privatizing Social Security holds dangerous prospects for the poor elderly people. However, a close scrutiny will reveal that the poor people are among those who would be benefitted maximum if the Social Security is privatized. First of all, privatization would provide a higher rate of return, thereby, raising the earning of the old retirees who are in most need of it (Biggs, 2001). Although apparently, the current Social Security system may appear to be progressive, transferring money to the poor elderly people, in reality, the system has several inequities that put the poor at a disadvantaged state (Biggs, 2001). For example, the poor elderly retirees are more likely to stay dependent on the benefits of Social Security than their rich counterparts for either most or all of their life post retirement. However, despite a progressive benefit structure of the current Social Security system; its benefits are not sufficient to fulfill all the needs of the elderly poor after retirement (Biggs, 2001). Additionally, the progressive structure of Social Security is weakened by the differences of life expectancy. Since the wealthy elderly live longer, they are the recipients of more Social Security benefits over the course of their lifetime than their poor counterparts. If the Social Security is privatized, an individual's benefits would not rely on his or life expectancy. Individuals would gain a property right to their benefits, because of which any remnant of the benefits would translate into a part of their estates to be inherited by their heirs (Biggs, 2001).
Broadly, privatization would give the workers a flexibility to decide on how they want to invest their contributions. A worker might be granted options to invest in five different funds including a stock market index fund, a money market fund, a U.S. Treasury bond fund, a real estate investment trust, and a corporate bond fund (Bosworth and Burtless, 1997). Though this investment approach will minimize the administrative costs, it, however, will limit the investment choices of the workers. Therefore, another strategy of investment is to allow private banks, mutual funds, insurance companies, and investment companies to enter a competition in drawing the attention of the workers to make investment of their retirement savings. This investment approach will permit workers an ample freedom to invest their money anyway they like, but the cost of administration will be high.
Under the current system of Social Security, a major portion of the Social Security payouts is administered through the imposition of payroll tax on the workforce. It is unfair to put the burden of maintaining the older generation on the shoulders of the younger working generations. Currently, the workforce needs to pay 12.5% as tax twice a month for Social Security programs, and there are proposal underway to raise the tax to 15% in the near future, which will increase the financial burden of the younger generation considerably (Balko, 2013). Under the current economic condition, when a large number of American populations (Baby Boomer generation) are approaching the retirement age and the USA is yet to recover fully from the subprime recession of 2008-2009, putting a stress of a payroll tax of 15% on the employment workforce is not a practical retirement solution.
Besides, the life expectancy of people has increased substantially than what it was in 1935 when the Social Security program initiated. At that time, the life expectancy of men aged 65 years was fewer than 12 years, where today the same is 18 years, and it is expected to reach 20 years by 2045 (Edwards and Tanner, 2013). However, with the increasing number of retirees and elderly people, the number of active workers able to support them is not growing up, because the average birth rate has fallen from it was three children per woman in the 1960s to two today (Edwards and Tanner, 2013). As per the projections made the Social Security trustees, the number of people aged 65 years and above will increase by 70% by 2030 compared to 6% increase in the number of active workers (Edwards and Tanner, 2013).
A Tidal Shift of Opinion in Favor of Privatization
Better late than never, a tidal shift in the opinion of public as regards privatization is taking momentum. A poll conducted by Zogby International under the commission of the Cato Institute reveals that a larger percentage of the US population (68%) is in favor of privatization. The poll results also showcase that 76% of people aged between 30-49 years and 82% people between 18-29 years are in support of privatizing Social Security (Balko, 2013). There was no demographic group whose support of privatization fell less than 54%. In fact, the older population of age 65 years and above also supported privatization by a margin of 55%-40% (Balko, 2013). It seems that older Americans have realized that had they have the option to make investments early in their lives, they would have lived far better and different lifestyles than they are living now under the current Social Security program. Middle-aged Americans have realized that there are still time for them to accumulate retirement savings that will allow them a comfortable lifestyle in old age, and not mere subsistence. The younger generation is also realizing that unless the current system is reformed, they need to continue paying 12.5% twice each month under the deception of "contribution" (Balko, 2013).
Conclusion
Social Security is the largest federal program that accounts for 23% of all the federal spending. The program has many financial imbalances due to which talks about reforming the program have been going on for over a decade through privatization. Privatization will enable the workers to save for their retirement in their private accounts and withdraw money from those accounts when they will approach retirement age or will become disabled. Privatization will also allow individuals to make their own investment decisions. Privatization will also transfer the savings of an individual into a property that can be inherited by his or her heirs. Besides the quality of life that is substantially compromised under the current Social Security system, which provides merely for the subsistence of the elderly, will be far improved. Privatization is also a far more practical retirement solution under the current economic scenario fraught with economic uncertainty and dwindling number of active workers. With a shift in public opinion in favor of privatization, it can be hoped that privatization of the Social Security would become real in not so distant future.
References
Biggs, A. (2001). Social Security Privatization: Bad for the Disabled?. The Cato Institute. Retrieved on 19th April, 2015 from <http://www.cato.org/publications/commentary/social-security-privatization-bad-disabled>
Bosworth, B. P. and Burtless, G. (1997). Privatizing Social Security: The Troubling Trade-Offs. Brookings Policy Brief Series. Retrieved on 19th April, 2015 from <http://www.brookings.edu/research/papers/1997/03/saving-burtless>
Hardaway, R. (2010). Privatization would save social security, not destroy it. Fox News. Retrieved on 19th April, 2015 from <http://www.foxnews.com/opinion/2010/08/31/robert-hardaway-social-security-congress-ponzi-scheme-workers-government/>
Balko, R. (2013). Privatizing Social Security Still Good Idea. Fox News. Retrieved on 19th April, 2015 from <http://www.foxnews.com/story/2002/08/15/privatizing-social-security-still-good-idea/>
Edwards, C., & Tanner, M. (2013). Reforming social security retirement. The Cato Institute. Retrieved on 19th April, 2015 from < http://www.downsizinggovernment.org/ssa/social-security-retirement>
