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Debate: Privatizing social security

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Should social security be privatized?

Background and context

Social Security is a social insurance program officially called "Old-Age, Survivors, and Disability Insurance" (OASDI), in reference to its three components. It is primarily funded through a dedicated payroll tax. During 2008, total benefits of $625 billion were paid out versus income (taxes and interest) of $805 billion, a $180 billion annual surplus. An estimated 162 million people paid into the program and 51 million received benefits, roughly 3.2 workers per beneficiary.

Due to projected difficulties with social security programs, many have argued, including former president Bush, that social security should be privatized (at least partly). This is a situation in which individuals are given subsidized personal accounts ("individual accounts" or "private accounts") through partial privatization of the system. President Barrack Obama "strongly opposes" privatization.

Economic Growth

Yes

  • Privatizing social security enables investment of savings Economic growth leads to lower unemployment, lower inflation, and a greater standard of living for society as a whole. The implementation of private accounts would mean a significant amount of money would be invested into the private sector. And since money could be shifted around, the most efficient and successful companies would gain additional investment funds.
Alex Schibuola. "Time to Privatize? The Economics of Social Security." Open Markets. November 16th, 2010: "If Social Security were privatized, people would deposit their income with a bank. People actually save resources that businesses can invest. We, as true savers, get more resources in the future."

No

  • Privatized social security accounts are more risky. Most stock market experts will point out that the long-term return on stocks has always been positive, despite temporary setbacks now and then. In other words, the market may go up 150 percent one decade, then down 50 percent the next, then up 60 percent the next, then down 25 percent the next. Overall, the return may be positive, but what happens to the retirees that hit age 65 during one of the downturns? Hopefully they were wise enough to gradually put most of their money in safer investments, but there's no guarantee they did the right thing.
  • Privatization subjects social security to market fluctuations. Privatization converts the program from a "defined benefits" plan to a "defined contribution" plan, subjecting the ultimate payouts to stock or bond market fluctuations.
  • Privatization during economic crisis would have been disaster. Privatization in the midst of the greatest economic downturn since the Great Depression would have caused households to have lost even more of their assets, had their investments been invested in the U.S. stock market.
  • Privatized social security cannot be assured to beat inflation. Social Security payouts are indexed to wages, which historically have exceeded inflation. As such, Social Security payments are protected from inflation, while private accounts might not be.
  • Privatizing social security would wrongly enrich banks. Privatization would represent a windfall for Wall Street financial institutions, who would obtain significant fees for managing private accounts.
  • Plenty of ways to reform social security w/o privatization Robert L. Clark, an economist at North Carolina State University who specializes in aging issues, formerly served as a chairman of a national panel on Social Security's financial status; he has said that future options for Social Security are clear: "You either raise taxes or you cut benefits. There are lots of ways to do both."[1]

Ownership: Does

Pro

  • Privatizing social security restores individual ownership. Conservatives argue that Social Security reduces individual ownership by redistributing wealth from workers to retirees and bypassing the free market.


Con

  • Privatization does not address long-term funding challenges. The program is "pay as you go", meaning current payroll taxes pay for current retirees. Diverting payroll taxes (or other sources of government funds) to fund private accounts would drive enormous deficits and borrowing ("transition costs").


Crisis? Is there a crisis requiring responses like privatization?

Pro

  • Social security is basically a giant ponzi scheme. "Why is Social Security often called a Ponzi scheme?" CATO Institute. May 11th, 1999: "Just like Ponzi's plan, Social Security does not make any real investments -- it just takes money from later 'investors,' or taxpayers, to pay benefits to earlier, now retired, taxpayers. Like Ponzi, Social Security will not be able to recruit new "investors" fast enough to continue paying promised benefits to previous investors. Because each year there are fewer young workers relative to the number of retirees, Social Security will eventually collapse, just like Ponzi's scheme."


Con

  • Social security not in crisis; no need for privatization Nobel Laureate economist Paul Krugman. "Inventing a crisis." New York Times. December 7th, 2004: "[T]here is a long-run financing problem. But it's a problem of modest size. The [CBO] report finds that extending the life of the trust fund into the 22nd century, with no change in benefits, would require additional revenues equal to only 0.54 percent of G.D.P. That's less than 3 percent of federal spending — less than we're currently spending in Iraq. And it's only about one-quarter of the revenue lost each year because of President Bush's tax cuts — roughly equal to the fraction of those cuts that goes to people with incomes over $500,000 a year. Given these numbers, it's not at all hard to come up with fiscal packages that would secure the retirement program, with no major changes, for generations to come."


Personal Wealth

Yes

  • Americans living at the poverty level must usually spend every cent of their disposable income just to survive. Few in the lower-middle class have the funds available to put into a wealth-generating retirement account. Thus, they must rely on social security income to pay the bills when they reach retirement age. Unfortunately, the current social security payouts are at or below the poverty level. The money you earn in benefits based on what you pay in is less than what you'd earn in a passbook savings account.


No

  • Privatized social security will cut tax revenues and social services. We all know that the social security system is severely underfunded; it's headed for bankruptcy sometime in the 2040s. Implementing private accounts will take 4 percent of the 12.4 percent taxes from every worker out of the trust fund. Thus, almost a 3rd of the revenue generated by social security taxes will be removed. Drastic benefit cuts or increased taxes will have to occur even sooner, which is a recipe for disaster.


Pro/con sources

Pro


Con


See also

External links and resources


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