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Privatization Of Social Security

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Autor:  anton  04 March 2011
Tags:  Privatization,  Social,  Security
Words: 1648   |   Pages: 7
Views: 340

Privatization of Social Security

The Social Security system is a hot topic with today’s who’s 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 it’s 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 today’s 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 trustee’s 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 it’s 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 participant’s 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 as they have time to recoup from the potential lose.

The overall personal accounts have a greater returns then the current system. In addition, if an individual dies they may bequeath their personal account to their children or a loved one. This system cannot be put into place over night, so a structure has been put into

place that would gradually integrate workers into the systems. The first phase would be workers between the age of 40-54, the second phase age 26-54 and the last group would integrate all workers. The initial allowable contribution amount would be capped at $1,000.00 per year in 2009 and would gradually rise each year by $100.00 plus growth in wages. Eventually all workers would be able to contribute 4% of their Social Security tax in to their personal accounts. So at the time of retirement they would receive benefits from their personal retirement account and Social Security.

Greater detail must be provided about the structure and administration of this plan. The system is governed by a centralized administrative structure that would collect personal retirement account contributions, manage the investments, maintain records and facilitate withdrawals at retirement. In addition, this centralized investment structure would help to minimize compliance cost for employers. Private investment managers would be chosen through a competitive bidding process to manage the pooled account contributions. A group called the Federal retirement Thrift Investment Board administers the TSP and is comprised of five independent part-time Presidential appointees and a full-time executive director whom the appointees select. These members work solely on the behalf of the participants and beneficiaries. The board also provides training and educational material to assist participants with the decision making process. This proposal does not come without a price.

Estimate that the president’s personal retirement account proposal will require transition financing of $664 billion dollars over the next ten years…This transition financing will not have the same effect on national savings, an thus the economy, as traditional government borrowing. Personal retirement’s accounts will not reduce the pool of savings available to the markets because every dollar borrowed by the Federal Government to the fund the transition is fully offset by an increase in savings represented be the accounts themselves. (Strengthen Social Security in the 21st Century, February 2005)

There are also the ongoing administrative costs to consider as well. The estimated cost would be 30 base point or .3 percentage points; this is much less considering most investments range from 88 to 125 base points depending on the fund.

In contrast, many other groups have proposed their own plan to reform Social Security. Many of the plans recommend increasing taxes, to “increase the payroll tax 1.89 percent would cover social security benefits for the next 75 years” (Chuck Blahous, April 5, 2005). Increasing taxes is never good for the country because it always has the potential to slow down the economy, which is bad for all Americans young and old. Another proposed idea was to limit the benefits for the wealthy. This is an interesting proposal, but who decides who is wealthy? As most people in the country know, the people with the most money have the most power. How can we allow people with power the right to decide their own fate? Lastly, postponing the benefits age has always been the first option. This is an easy answer for many, but where do we draw the line? We have already extended the benefits age to 65 and the average life expectancy is 72. We are only allowing the average person 7 years of retirements after decades upon decades of service.

In conclusion, President George W Bush declared “According to the Social Security Trustees the amount that each year of inaction adds to the cost of fixing Social Security is $600 billion” (State of the Union Address, April 5, 2005). This clearly shows that something must be done to reform Social Security before nothing is left for anyone. I personally would like to have control over my own future.

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