Recently, the subject of Social Security privatization has resurfaced because of the nomination of Paul Ryan as the Republican candidate for Vice President. In 2010, Mr. Ryan proposed in his work "Road Map for America's Future" that workers should be allowed to divert one-third of their Social Security taxes into private accounts that individuals could invest and control.
Politics aside, this is a subject that needs to be respectfully analyzed. What are the pros and cons of Social Security privatization?
Pros of Social Security Privatization:
My husband has been an institutional stockbroker for 41 years. He has pointed out to me that people in the investment business would stand to earn much more money, since billions of dollars would be invested in the stock market. This would provide a huge influx of capital that would be invested in large corporations, mutual funds and financial markets. This would raise incomes for people in the investment business.
In a bull market, successful investors could make more money than the guaranteed amount from Social Security. During those bull market years, people could retire with a large nest egg, which is what Mr. Ryan concluded in his analysis of the benefits of privatization.
Cons of Social Security Privatization:
If people could remove money from their Social Security investment accounts over the years for things like down payments on homes, medical costs or educational expenses, many people would raid their accounts regularly, just as they now raid their IRA's.
However, it is possible that raiding Social Security savings would be strictly forbidden. Even so, not everyone would retire in a bull market. Every few years, some people would be retiring in a bear market, which could mean that they would be worse off than if they had chosen to take traditional Social Security. It would be a type of Russian roulette.
Some people would make investments that turned out to be disastrous. Remember those who invested in Enron or put all their retirement savings with Bernie Madoff? In both cases, they lost nearly everything.
For those people who did choose to invest one-third of their Social Security taxes into private accounts, and lost it, their traditional Social Security benefits would be cut by one-third. Most retirees can barely survive on Social Security alone right now. Losing one-third of their benefits would be devastating.
People can already put money in personal retirement accounts that they manage themselves. Unfortunately, research shows that many of them spend that money during the first few years after they retire, rather than spreading it out over their lifetime. Although investment planners recommend that people never withdraw more than 3% - 4% of their retirement savings in a single year, far too many people exceed this amount and run through their savings quickly.
Would the government have to spend substantially more on low cost housing for the elderly, special supplemental payments and food stamps for all those who lost that portion of their Social Security taxes that they had managed and invested themselves? Would the government be spending less on Social Security, only to spend more on providing supplemental income? Although it is impossible to predict the future with absolute assurance, it is possible that what started out as a Christmas gift for people in the investment field could become the Grinch who stole Christmas for future generations of taxpayers and retirees.
Other Options for Saving Social Security
There are ways, other than privatization, that could help put Social Security on solid ground. Social Security taxes could be collected on incomes above $110,000. The retirement ages could all be raised by one year, including the age of early retirement, which is currently 62. In fact, the age of early retirement could be raised to age 64. If someone is disabled, they could still collect disability. However, able-bodied people would be better off waiting to collect Social Security until age 64, at the very least. These modest adjustments would insure that Social Security benefits could be paid in full for many decades. (Disclosure: I am 63, so these changes could affect me. However, if they strengthened Social Security, they would be worth it.)
Another suggestion that could be made to Social Security is raising the tax from 15% (half paid by the employers and half paid by the employees) to 16%. Some people have also suggesting reducing the Cost of Living Adjustments that retirees currently receive. They would still receive a COLA, it would just be smaller. Needless to say, theses ideas are not popular, but they would be effective in saving Social Security for future generations, and they may honestly be the changes that must be made.
There are certainly both pros and cons to the idea of Social Security privatization, and undoubtedly there would be both winners and losers with this change. However, since it seems to be a topic of consideration again, it is important that we carefully discuss the advantages and disadvantages, as well as other options for saving Social Security. What do you think?
Other articles that may interest you are:
Do You Need a Million Dollars to Retire?
Retirement Deferred by Parent Student Loans
Retirement Income from Annuities or Investment Income
Cheap Places to Retire
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