What does privatizing S0cial Security mean? There’s lots of talk about a looming government shut-down. What’s at issue of course is the budget. Some people argue for increasing taxes and others talk about reducing expenditures. Part of that discussion includes talk about changing Social Security. As a way to reduce government spending, some people argue that Social Security should be made private or at least somewhat private. But what does that mean?
The current proposal by Representative Paul Ryan suggests that workers under 55 have the option of investing a third of their Social Security taxes as they see fit in their own personal retirement accounts. So it would mean that you control how a portion of your Social Security taxes get invested just like you control your IRA investments.
You’re going to see the financial services industry back this proposal big time. That’s because if this law is passed, there will be more demand for their services – yours truly included. The interesting thing about the current proposal is that people participating in this program will still have minimum guarantees. That’s pretty hard to do since everyone is going to invest as they sit fit.
This plan offers six choices: five index funds and a life cycle fund. (Once the account exceeds $25,000, more options become available.) The guarantees come into play when you retire. At that time you can opt for a lifetime annuity income (issued by the government). It would provide monthly tax-free income for life.
The plan works as long as investors stick with long-term investing, but that might be a pretty tall order. Long-term averages are great, but investors often react to short-term stock market cycles. The reality is, people who have the freedom to decide how to invest their own money don’t always invest wisely. And having that freedom doesn’t guarantee they won’t react unwisely during challenging market periods. Offering guarantees might encourage people to invest to aggressively knowing they won’t suffer from poor investment choices.
Is Social Security privatization a good idea?
If nothing changes, the Social Security fund is not going to be able to pay all its obligations after 2037, so it makes sense to consider changes now. If privatization goes forward, it will cause an immediate deficit of up to $2 trillion during the first 10 years after enactment. But over the very long term, even the Social Security Administration admits the idea of private accounts could help strengthen the structural weakness in the system.
Even though I’m a capitalist, I’m not convinced the current proposal is solid. I need to see more details. I don’t see how the government can offer guarantees if the person makes bad investment choices. My sense is the idea of introducing private control and responsibility over Social Security is a very good idea. I’m just not sure that this is the right plan. What is your take?