Introduction
The US Social Security Program provides a protecting benefit to American employees and their families for retirements, early death, and disability. When we discuss the US Social Security program, it is the largest program launched by the government in the world with the single most expenditure of US$ 612 billion of the 2008 federal budget of US$ 2.9 trillion. When the Social Security plan was launched in 1935, the contributions of 17 workers paid for the benefit of one individual who retired. This estimated ratio is expected to rise to 2.1 workers in 2030. Over 40 million baby boomers will reach their retirement age of 60 years between 2010 and 2040. Shifting the Social Security program towards privatization is one major proposal in order to prevent the financial deficit in the future. The privatization of the program will benefit the workers and their families.
Social Security Program - Background
Social Security plan was launched when Franklin Roosevelt signed the Social Security Act on August 1935. This program was launched with the intention of providing social insurance system to the workers if they pool a portion of their salaries together in order to protect each other against any calamitous situation for example sudden death or accident that results in disability. Through this social security program, the workers avail a basic level of monthly income that they have paid into the system. According to a study in 2009, 69% of the retired worker, 18% of disabled workers, and 13% of survivors of deceased workers were able to benefit from the Social Security program.
It is the largest program launched by the government in the world with the single most expenditure of US$ 612 billion of the 2008 federal budget of US$ 2.9 trillion. Even though the pensioners and personal saving retirees are supposed to benefit from the social security program, the payments have become de facto plan for the citizens. In the elderly beneficiaries of the plan around 40% of unmarried couples and 20% of married couples have benefited from the Social Security plan for 85% or more of their basic income in 2009. The operations of Social Security program are conducted in the way that workers pay into the Social Security program and receive benefits of this when they become eligible for it. The program does not maintain any sort of individual saving accounts for individual workers, but it functions as a pay-as-you-go system in which one generation of workers is able to benefit the previous generation of workers.
The Social Security System has faced a lot of financial turmoil in the past. The program has witnessed budget shortfalls way back in 1980s that prompted drastic adjustments to the system of the coverage and financial assistance provided by the program. According to the 2009 report published by the Board of Trustees of the Social Security, the program will face a budget deficit of more than US$ 15 trillion in the next 75 years. The report suggests that the budget deficit will rise and will exceed the tax revenues from 2016 onwards and the overall social security system will become insolvent which means that it will be unable to pay it scheduled benefits fully to the beneficiaries and the reserves will be completely exhausted till 2037.
There are many factors that will contribute to the long-term insolvency of the Social Security system. Over 40 million baby boomers will reach their retirement age of 65 years between 2010 and 2040, and this is known as America’s silver tsunami. The aging population on annual basis means that the working force share in the system is declining as compared to the population that is retiring which will eventually result in the unsustainability of the Social Security system in the coming decade. Life expectancy of the population is likely to increase, and the number of retirees who will benefit from the Social Security program will also increase over time. Shifting the Social Security program towards privatization is one major proposal in order to prevent the financial deficit in the future. The privatization of the program will benefit the workers and their families.
Privatization of Social Security and Benefits
Many benefits can be achieved through the privatization of Social Security system. If the government plans to amend the current system of Social Security program and to control the collapse of the system in the near future, it will require to implement drastic steps by deep cuts in the beneficiary system. Along with this, the government will have to implement substantial rise in taxes and focus on heavy borrowing system. In order to avoid this, a better solution is the privatization of investment accounts that will eventually be funded by existing payroll tax. Through this, the benefits cuts and tax hikes will not be required, and the beneficiaries will be able to benefit in the way they do today.
When the Social Security plan was launched in 1935, the contributions of 17 workers paid for the benefit of one individual who retired. This estimated ratio is expected to rise to 2.1 workers in 2030. If the privatization of the Social Security program occurs, it will allow for the workers to contribute to their own private accounts. This will result in a reduction of future loss of money that occurs due to lesser contribution by workers.
If the privatization occurs, the retirement accounts will provide the workers with contractual rights to retirement benefits. This is a basic right that is missing from the current Social Security System, and it is extremely important that it should be implemented for the benefit of the workforce. This for example can be understood with an example that in 1960 a case in US Supreme Court Flemming v Nestor was filed regarding a retiring immigrant who was legal in United States and was eligible for the Social Security benefits as he had paid the system for the 19 years. As he got deported for his connections with Communist Party, he was denied his Social Security benefits right under the current social security.
If the privatization of the Social Security system occurs, it will provide greater benefit to the worker in the way that any medium income employee who is born after 1964 expects around 1.9 percent – 2.7 percent return in the current Social Security system. If the privatization occurs, it will provide more money in the pockets of the beneficiaries with return of 7 percent to 9 percent. This certainly does not expose the retirement plan to risk because if the private accounts are regulated it will allow the individuals to invest in diversified portfolio and mutual funds that are approved and not in single high risk stock portfolio. As the opponents claim, a personal retirement plans after the privatized portfolio will not result in burdensome transactions but the overall diversification of it.
In the past, the pensioners and personal saving retirees are supposed to benefit from the social security program, the payments have become de facto plan for the citizens. In the elderly beneficiaries of the plan around 40% of unmarried couples and 20% of married couples have benefited from the Social Security plan for 85% or more of their basic income in 2009. This meant that the budget surplus in the Social Security was utilized in the wrong direction. If the Social Security system is privatized, it will keep the retirement money from being diverted into the wrong direction.
The African Americans will benefit from the privatization of the Social Security system. The reason being that African Americans have lower life dependency, and the rate of return offered to African Americans is relatively lower than the other ethnic groups. Other than this, the privatized Social Security system will allow for benefits to transferring from one generation to another. Third the pool of funds that is generated in the form of Social Security account will help in the economic development of the ethnic group. According to the current system if the made die whole belongs to African American group before becoming eligible for the Social Security program his wife is able to receive either her own benefits or his but not the benefits of both beneficiaries. In the private Social Security system, funds can easily be transferred from one generation to another.
Major Impediment in the Implementation of the Private Social Plan
One major obstacle to replacing the current Social Security plan and implement a private system is that the investment risk that individuals have to bear is higher in the privatized system. If long-term financial turmoil or economic downturn occurs or a poor investment strategy is in place will result in the individual reaching the retirement age with fewer savings as expected. One way in order to overcome this problem and effectively implement the private Social Security plan is to maintain a certain portion of the Social taxes to at least provide the guarantee of minimum payment amount when an individual reaches retirement age. A retirement should be planned in manner that combine aspects of effective return with both public and private system that can help in promoting economic growth and maintain the investment safety for beneficiaries.
Conclusion
The US Social Security Program provides a protecting benefit to American employees and their families for retirements, early death, and disability. The operations of Social Security program are conducted in the way that workers pay into the Social Security program and receive benefits of this when they become eligible for it. The program does not maintain any sort of individual saving accounts for individual workers, but it functions as a pay-as-you-go system in which one generation of workers is able to benefit the previous generation of workers. Shifting the Social Security program towards privatization is one major proposal in order to prevent the financial deficit in the future. The privatization of the program will benefit the workers and their families.
End Notes
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Annual Reports “Status of the Social Security and Medicare Programs: A Summary of the 2009” Social Security Administration website, (May 12, 2009).
Hagemejer, Krzysztof "The role of national social protection floors in extending social security to all" International Social Security Review. (Jul-Dec2013,) Vol. 66 Issue 3/4, p3-19.
Press Office Fact Sheet: Social Security Basic Facts," Social Security Administration website, (Aug. 5, 2009).
Smith, Eric L., Conrad, Cecilia, Boston, Thomas D “ Should Social Security be privatized?” Black Enterprise, (Feb 1999), Vol. 29, Issue 7.
Tannahill, Bruce A "Social Security Retirement Benefits--The Basics" Journal of Financial Service Professionals. (Nov2013), Vol. 67 Issue 6, p27-30.
