The Social Security program was enacted in 1935 to provide post-retirement income security for workers and their families. Since then, it has grown to become the world’s largest government program with a total expenditure of $768 billion in fiscal year 2012. Americans are seriously concerned about the sustainability of Social Security, which has led to questions about whether privatizing the system could be wise. Read on to learn about Social Security privatization efforts, and the arguments for and against such a move.

The Current Status of Social Security

Social Security isn’t in great shape right now. Various reports have estimated different dates at which the entitlement program may have difficulty paying out full benefits to those who should receive them, but the current most cited year is 2033. One of the big reasons for why Social Security is in big trouble is because of our changing demographics and health statistics. When Social Security was first introduced pre-World War II, people did not live nearly as long as they do today. In addition, the post-World War II Baby Boom led to a glut in our population size. Social Security’s forecasting methods weren’t able to accurately predict the situation we’re in now, where there are many healthy people retiring who will live longer than ever before. To put this into context, in 1960, there were about 5.1 workers paying into the system for every retiree; now the ratio has shifted to under 3:1.

What does “privatizing” Social Security mean?

Given Social Security’s current state, there have been solutions suggested to try to fix it. One of the most popular is privatizing the system. That would most likely mean creating individual private accounts for the workers. Those private accounts will be subject to more control by those who are paying in, and would be able to interact with the private market. The funds could be invested in things like private stocks, which advocates point out would boost workers’ rate of return.

The proposition of its privatization came into the limelight when George W. Bush proposed the Growing Real Ownership of Workers Act of 2005. The bill aimed at replacing the mandatory payouts from workers’ checks with voluntary personal retirement accounts. In 2010, Paul Ryan, a major supporter of privatization, attempted unsuccessfully to reignite interest in the idea in his Roadmap for America’s Future budget plan.

What are the arguments for privatization?

Proponents of privatization argue that the current program significantly burdens fiscal debt and will lead to increased debt and taxes for future generations. They claim that privatizing it will keep the program from collapsing in the future. It would actually lead to higher post-retirement earnings for workers or, at the very least, keep earnings at a relatively stable rate. Additionally, it would empower workers to be responsible for their own future.

Advocates for privatizing social security also point out that in the past, funds in Social Security have been diverted to pay for other things the government has needed to pay for, and then replaced in time. If Social Security was privatized into individual accounts, the government wouldn’t be able to take such actions. According those who want to privatize Social Security, doing so would also help minimize the bureaucracy involved in the process.

Case Study: Chile

Chile’s post-privatization success is used as an example that the United States can learn from. Chile transferred to a new program in which  workers put 10-20 percent of their incomes into private pension funds. When the worker retires, an insurance company gets involved to help with the dispensation of money, but even at that step the Chilean worker has a lot of choice and flexibility. Although long term effects of the plan have yet to be discovered, the short term effects are positive.

What’s the argument against privatizing the Social Security system?

Opponents worry that privatizing social security will lead to risk and instability in post-retirement earnings and cause significant reductions in the same. They argue that privatization can also potentially place minorities at a disadvantage, as well as anyone who doesn’t have the time, knowledge, or desire to effectively manage their account. Many also claim that the media has exaggerated the program’s financial demise and that its balance is currently in surplus with most Baby Boomers currently in the workforce.

Those who argue against Social Security privatization have also expressed concern about the financial and logistical resources that would be needed to start a privatized Social Security program. They also believe that a move toward privatization would create more, not less bureaucracy, because of the complexity of private markets. Several groups and individuals, such as the Center for American Progress and economist Robert Barro oppose the idea.

Conclusion

It’s no secret that Social Security is currently struggling, and if something is not done, it will continue only get worse. There’s no easy answer, but privatization is one frequently suggested option in the public debate. Exactly how privatization would occur, what its benefits and downsides would be, and its overall effectiveness are still up for debate, but for now it’s definitely an idea that we can expect to see on the list of possible solutions for the foreseeable future.

Resources

Primary 

Social Security Administration: A Program and Policy History

Social Security Administration: The Social Security Act of 1935

Social Security Administration: Fast Facts & Figures About Social Security, 2012

Social Security Administration: The 2013 Annual Report of the Broad of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds

Social Security Association: Privatizing Social Security: The Chilean Experience

Additional 

Daily Signal: Social Security’s Unfunded Obligation Rises by $1 Trillion

CATO: Still a Better Deal: Private Investment vs. Social Security

Safe Haven: Privatize Social Security Before I Spend Your Pension

Sun Sentinal: Privatization Would Help But Liberals Resist Changes

Independent: Privatizing Social Security the Right Way

Freedom Works: Chilean Model of Social Security

NCPSSM: The Truth About Privatization and Social Security

Economic Policy Institute Report: Saving Social Security With Stocks: The Promises Don’t Add Up

Fortune: Privatizing Social Security: Still a Dumb Idea

Center on Budget and Policy Priorities: What the 2013 Trustees’ Report Shows About Social Security

CATO: Speaking the Truth About Social Security Reform

AARP: In Brief: Social Security Privatization Around the World

National Bureau of Economic Research: Social Security Privatization: A Structure for Analysis

NEA: Social Security Privatization: A Bad Deal for Women

Salome Vakharia

Salome Vakharia is a Mumbai native who now calls New York and New Jersey her home. She attended New York School of Law, and she is a founding member of Law Street Media. Contact Salome at staff@LawStreetMedia.com.

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