Academic Mind : Unpublished Papers : Liberal Arts : Political Science : Social Security Privatization
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Written by Christopher King
California Polytechnic State University
Social Security PrivatizationSome would say that Social Security is one of the strongest American policies ever put into effect. Intact for 70 years, the Social Security system has been the main source of income for the average retired individual over the age of 65. The system was first established in 1935 by President Roosevelt to combat poverty among elderly citizens. By 1939, the act had been broadened to include benefits for spouses, children, and those who were survived by the death of their loved ones. Throughout the years there have been many other additions to the Social Security system such as lowering the age of eligibility to 62 years old in 1956 for working females and then again in 1961 for male workers as well. Also in 1956, the system was expanded to provide benefits to disabled workers from age 50-64 (Stephan 20). This system, which began as an act back in 1935, became an established independent agency when President Clinton signed the Social Security Independence and Program Improvements Act in1994. Over the years Social Security has grown and seemed to function properly in order to provide a means of financial survival for retired individuals.
Although the Social Security system shows a history of serving its purpose well throughout the twentieth century, the Bush Administration feels that it is broken and has put an overhaul on the top of their list of priorities. The supposed fear is that three years from now in 2008, when the baby boomers start to retire, there will be a massive strain on the Social Security system. They are attributing this strain to the fact that the average life span is increasing which will furthermore make Social Security benefit payout increase as well. This in turn, they say, will cause a 27 percent cut in benefits when future generations begin to retire. The Bush Administration's big plan to combat this issue is the privatization of benefit funds. What this basically means is the government will allow for workers under the age of 55 to invest some of their payroll tax into a personal or private account that consists of a bond/stock funds mix. At first glance, this sounds rather nice, having less government influence in what we do with our Social Security taxes; however, privatization is not all its cracked up to be. If the real goal of the Bush Administration is to "fix" the current system, then it does not seem logical to divert future funds away from it. This seems to me like it would do quite the opposite, that is, there would less that could be paid out in Social Security benefits. The result would leave the system worse off causing the government to take more severe measures to remedy the problem; raising taxes and cutting Social Security benefits immensely, for instance. This reform proposed by the Bush Administration eludes the original problem at hand and, in fact, creates an even larger one. With this in mind, the privatization of Social Security funds should not be considered a viable solution to strengthen our current Social Security System.
Currently, Social Security operates by drawing a payroll tax off the top of every employee's salary in the U.S. The 7.65 percent tax of the gross annual income of the employee is matched by the employer to payout the sum of 15.30 percent to the system, while self-employed individuals end up paying the full amount without the help of another party. These taxable earnings are capped off at a certain amount annually where the individual is not required to payout anything exceeding that amount. Currently this wage cap sits at $90,000. The age of full retirement has normally been 65 year old; however, that age varies according to the individual's year of birth. According to the official website of the U.S. Social Security Administration, in 1983 President Reagan signed the Social Security Amendments stating that the full retirement age will increase until it reaches 67 for people born in 1938 or later. This affects how much in Social Security benefits an individual will receive according to when they begin their retirement. For example, if the person were born in 1942 they would be eligible to receive full retirement benefits at age 65 and ten months. However, if they have plans to retire at the eligible age of 62, they will receive only 75.8 percent of their full retirement. At age 63 they will receive 81.1 percent, and at 64, 87.8 percent. For those born in 1960 or later, the full age of retirement is now 67 years old. The extent, to which Social Security will benefit this age group, including my generation, falls at the mercy of future plans to revamp the system.
As previously stated, the Bush Administration believes the current Social Security system as well as its future is in grave danger. Attributed to an increase in life expectancy, they believe that the large numbers of baby boomers due to retire in the next couple of years will trigger the collapse of the system, leaving nothing but the ruins of a fallen sense of financial security for future generations of retirees. Their claim is that by 2018 this will cause the amount the government pays out in Social Security benefits to far outweigh that which they receive in taxes. According to the official White House website, by 2027 the system will require an additional $200 billion annually to remain functional; by 2033, that annual debt will reach $300 billion; and by 2042, the Social Security system as we know it will be non-existent.
Yes, on average we are beginning to live longer than past generations. In fact, according to the National Center for Health Statistics, life expectancy has been increasing by 0.1 year annually for the last 30 years and will continue to grow. Yes, it will create a minor strain on the system; however, it does not seem like enough to destroy it. The issue pertaining to the baby boomer population retiring will also put a strain on the system, but not nearly to the extent the Bush Administration says it will. They fear that the worker-to-retiree ratio will get down to 2 to 1, with less people in the workforce to contribute to the Social Security system. The factors not taken into consideration are that today's workers earn much higher wages and have more career longevity which greatly help compensate for the declining worker-to-retiree ratio (Reyes 32). Not to mention that the large numbers of baby boomer retirees have been pre-funding their retirement by contributing a massive amount during their years in the workforce. This is creating a surplus of funds for the system, which is believed by Social Security trustees to continue to grow until 2018. Even with changing demographics, it is still projected to be enough to payout 100 percent of promised benefits through the year 2042—the year, according to the Bush Administration, the system is supposed to go bankrupt. After that, the system will be able to pay out 73 percent of benefits promised (Drutman 34).
What are their plans for reform? Well, President Bush claims to be reviewing many options to alleviate the problems of the supposed "failing" system as alternatives to increasing payroll taxes such as: indexing price benefits, limiting benefits for wealthy retirees, or increasing the retirement age. However, the only one they seem to be pushing heavily is the privatization of Social Security funds.
The cost of administering privatization alone would far outweigh its benefits. At $2 to $3 trillion to implement, the increased national debt could greatly lessen any benefits created from private accounts. Contrary to what President Bush is proposing, Congressmen Charles B. Rangel (D-NY) and the late Robert T. Matsui (D-CA) strongly believe that with privatization, the reserves for the Social Security trust funds will become completely emptied out by 2021 in the attempt to battle its annual shortcomings (Reyes 32). Thus, Bush's privatization plan will break the Social Security system in just half the time it would supposedly go broke if it were to remain unaltered.
Bush's proposed reform for the system calls for allowing part of the money that workers contribute to Social Security to be put into individual personal accounts under the control of the retiree. Essentially, this means taking money out of the Social Security system instead of adding to it. I'm sorry Mr. Bush, how again does this help to strengthen the system? Considering it is the contribution of funds to the system that boost its financial well being, it seems quite clear that taking the funds out of it and putting them into personal accounts will only make the system weaker, thus lessening the financial security of retired individuals of the future.
Using privatization means investing a portion of the individual's Social Security benefits into stock funds. Although this may seem like a good idea to some—mostly those on Wall Street who drool over the idea of Americans dumping their retirement into the market—it can actually have adverse effects. That is, investing in the stock market is a gamble. It is true that someone can gain great wealth and be very successful with stock investments; however, it is also true that frequent and unpredictable market fluctuations can cause an individual to loose everything they have invested, including retirement funds. The stock market has not exactly been an exemplary model for financial security. Look at the dot-com market crash for instance, or even the market today. One minute you're up with a large return on investment, the next minute it could vanish depending on your timing and knack for playing the market. What kind of financial dependability is that? Social Security, on the contrary, was designed to provide retired individuals with the assurance that they would be financially stable upon retirement. It was this reason that the policy was given the title Social Security in the first place. Start investing benefit funds from the system into the personal stock accounts, and they might as well change the name to Social Insecurity.
There have been a few cases around the globe where countries have tried their hands at the privatization of retirement funds but failed miserably. Among them was Great Britain. Similar to what President Bush is proposing, the Thatcher government of the 1980's let citizens use part of their government pension funds to invest in a personal account. To devise the plan, the British Parliament relied heavily on the insurance industry for assistance—oddly enough, the industry that would benefit most from it (Cohen). As a result, it created an intense competition among insurance companies to sell investment plans with little information provided to those purchasing them. There were also many hidden fees involved in the set up of the accounts that the consumers were not aware of. Regardless, the initial public response was extremely positive with millions signed up in hopes to better their financial future for retirement. Not long after, it was quickly realized that it was actually costing more to put these funds into personal investment accounts. Many individuals had little to base their investments on because of the numerous hidden fees previously mentioned. The result was a 1.58 billion-pound surplus deficit and thousands with little saved for retirement (Cohen). It sounds oddly familiar to what President Bush is proposing here in the U.S. Although it's never fun to have a friend or neighbor fall on hard times, we must learn from their mistake instead of making the same one on our own.
As Americans are becoming more and more educated on the issues surrounding Social Security privatization, less and less people are found in support of President Bush's plan to privatize. A poll taken by AARP shows that of 1,500 people at the age of 30, 66 percent say they would like the existing Social Security system to remain intact with little or no changes made to it. For people 60 years of age and older, this number jumped to 79 percent opposed to any Social Security reforms that include privatization (Basler 31). Of the population in this survey that support private accounts, 35 percent had a change of heart when informed that privatization would greatly decrease the benefits offered by Social Security (Basler 32). Also in the same poll, 48 percent of supporters changed their minds when they found out how much it would cost to implement this plan, and opposition rose to 62 percent once they examined the risks involved with investing in the stock market. This just goes to show that many Americans do not fully understand what negative implications diverting funds to private accounts can have on the state of the Social Security system. It also shows that some information that goes along with this plan is not being fully disclosed by the Bush Administration.
There may be an underlying cause or hidden agenda that is accompanying President Bush's attempts to reform Social Security. Polls show that there is a strong correlation between those who invest heavily in the stock market and those who vote Republican (Drutman 34). If privatization becomes a reality, and benefits are invested in the stock market, individuals will be forced to rely on corporate profits for means of retirement by dumping more money into the market and playing the stock game to ensure that they will have something to live on once they retire. This does not sound like a plan that is in the best interest of the American people. In fact, considering that many of Bush's major campaign supporters come from the financial services industry, this more or less sounds like a sneaky attempt for Bush to help his friends of the corporate world turn an even bigger profit at the expense of the American working and retired population.
While the numbers of those in opposition to the reform are growing rapidly, there are still a handful of people that support it. Many believe that investing the benefits into a bond/stock fund would have a good opportunity to earn a higher return on investment. For example, a younger worker earning roughly $35,000 a year in his or her career could potentially reach one quarter of a million dollars upon retirement if they invest it in a private account. Unfortunately, most of the supporters of Bush's privatization plan seem to fall in the age group of 18 to 39, who have already given up on any idea of a working Social Security system to rely on for their retirement. Rachael Winkenwerder, a graduate student at Texas State University in San Marcos; for example, stated, "I like the sound of private accounts." She continued to say, "For someone my age they really aren't much of a gamble because I wasn't going to get much from Social Security anyway" (qtd. in Basler 11). This seems to be the general attitude toward the subject with people of this age group.
Being an individual in this age group myself, I would agree that this system needs some strengthening in order for it to operate at its fullest capacity. However, I can clearly see that privatization is not the right solution whatsoever. I strongly believe there is a good solution to this problem that should be considered more closely. That solution is increasing or even eliminating the wage cap all together. As previously mentioned, currently the cap is at $90,000 per year. This means that for those who make salaries above and beyond that amount, payroll taxation no longer takes place after the $90,000 cap. For the rest of us who do not earn that much, we are continually taxed on 7.65 percent of all our earnings. If the wealthier population of our country were to receive the continuous tax with no cap or limit to where that taxation cuts off, the system surplus would grow rapidly. With all do respect, they can afford to pay the taxes without a cap better than those of us who already do.
The Social Security system has withstood the test of time, 70 years to be exact. It has the potential to last well into the future. If all possible solutions are explored with some nonpartisan planning, a more robust system that works to ensure Americans of a more financially sound retirement could be created. The future of so many Americans is riding on the decision to reform Social Security. Preventing privatization from taking place is the first step to ensure that future.
Basler, Barbara. "Changing Social Security is Risky Business." AARP Bulletin
Basler, Barbara. "Changing Social Security—Will Young People Go for It?" AARP Bulletin
Cohen, Norma. "Privatization Bombed in Britain." AARP Bulletin
Drutman, Lee. "A 2005 Item: Social Security Privatization." Multinational Monitor
Reyes, Karen Westerberg. "Myths and Truths About Social Security." AARP Magazine
Stephan, Andrew. "There is a Welfare State Here, Too." New Statesman
Social Security Online. 2005. The Official Website of the U.S. Social Security Administration
Mar. 2005 http://www.socialsecurity.gov.
"Strengthening Social Security." 2005. The Official Website of the White House
Mar. 2005 http://www.whitehouse.gov/infocus/social-security.