Sunday, June 26, 2005

Social Security: Moving it Forward with Private Accounts

When President Bush stepped forward this winter with the goal of bringing feasibility and reform to Social Security, there was the hope and expectation that Congress could come forward with a bill that would satisfy politicians on both sides of the aisle and the general public. He never presented a specific plan but encouraged the idea of voluntary private accounts that would make up 1/3 or 4% of the social security payroll tax. Ever since his initial suggestions about reforming the system and adding private accounts, there has been consistent negative publicity (AARP and other groups) and clear opposition from Democrats even though a bill has yet to be drafted and brought to Congress. To be fair, the public has also been very wary of private accounts according to many polls and many Republicans have also been hesitant to support them also (ie. Lindsey Graham of South Carolina). While the public and politicans are currently skeptical about the idea of private accounts, their benefits far outweigh the costs in my opinion. And while private accounts may not be the answer to Social Security’s solvency, they offer many advantages to the current system. Specifically, 3 main advantages stand out:

1. Higher Rate of Return- The average interest taxpayers are getting with their money in regular Social Security Accounts is around 1.23 percent per year. This is in contrast to the average stock market return of close to 10% over the last 2 20-year periods. With the mutual funds in private accounts, all diversifying risk will be minimized and only market risk will affect the accounts. Therefore, these mutual funds will go up and down with the market and over several years, average returns of much greater than 1-2% are likely.

2. Personal Property- With the current system, if a worker dies before they retire the money they have been taxed for Social Security their whole life stays with the government. The money they put into payroll taxes is not transferred to their family or given to a charity or organization of their choice. With private accounts, the 4% or particular percentage of payroll tax accumulated would be able to be passed down to family or the recipient of choice. Also since this 4 % is the worker’s property, he or she can choose (out of a series of mutual fund choices) the fund that they feel is the best investment in their personal situation. This choice gives them not only the freedom of investment but the opportunity to learn more about other financial options outside of the Social Security system.

3. Promotes Ownership- As the global and information based economy continues to hit middle and lower class America with stagnant real wages, smaller pensions, and less financial security, the need to save and invest for retirement is crucial. In order to save and invest, the government should be promoting the ownership of assets such as stocks, bonds, real estate, etc. for a financially secure tomorrow. For many Americans, the only asset they own is their house. Allowing taxpayers to own a private account as part of their Social Security payments will not only give each worker an asset they own but also a chance to earn a far higher return for retirement.

While opponents tout the transaction costs of private accounts (financial fees, changing the system) and volatility of the market, the movement towards a privatized system seems positive for the aforementioned reasons. While there will be transaction costs, giving workers an account where they can earn a much greater rate of return that they tangibly own seems to far outweigh the costs. Addressing volatility, the market may be especially volatile in the short-run but when saving for money for more than 2 decades, return has always been positive and is much greater than what the government currently pays out. The public may still have doubts about private accounts and the Democrats may want the same New Deal government ran system but what we need is change as our system must move forward into the 21st century. A system that provides freedom and financial opportunity is much better than a system of welfare and government control.


  • A lot of good points have been brought up here. One of my favorites was ownership. Because of the social safety net in this country, and because of the increased standard of living across class lines in this country (despite rising inequalities), the definitions of the "haves" and the "have-nots" have changed. It used to be that the have-nots were the people who couldn't feed their families. Then it was the ones who didn't have a phone, or a television set. Then it was the ones who couldn't afford the internet. Now many people even in the poorer SES brackets, have cell phones, internet, and a guarantee of at least substinence in their lives. Instead, the haves are the people who can help send their children to college, and who can leave something behind for their family, and who have the luxury of having money to save and invest. This country has become divided, among other things, by people's knowledge of and involvement in, the stock market and other investment systems. The idea, for many upper and middle class people in this country, is taken for granted. They got a savings bond from their godfather when they got baptized. They had a college investment account by the time they started high school. They were saving their alloance money in a piggy bank to buy a discman in middle school. Their employer will give them stock options when they get their business degree. They'll have a personal banker or a financial advisor, or they'll find an online company which offers easy to follow, low risk mutual funds. That's just the way their life will go.

    For others, however, the luxury of giving your godson a savings bond doesn't exist. Some people's parents won't ever have money to put in a college savings account. Some people never put that quarter in a piggy bank, because they never got more allowance than they needed to take the bus to school and buy a subsidized lunch. They'll never work for a company that offers them stock options. They'll never have extra money to invest.

    Privatized social security, while not offering a sollution to any of those specific differences, would allow all employed Americans, the have nots as well as the haves, to participate in the investment process and system. It would allow people who might not have extra money to invest for their future or for their children's futer, to learn about and participate in the system that allows us fortunate ones to do just that. In short, it adds a common element to the lives of the "haves" and the "have nots" and allows the "have nots" to finally have some control over their financial future, aside from trying to figure out if their factory will be open, or if they're working well enough at their fast food restaurant, to hold their job. Instead of sitting around and waiting for fate, luck, or the government to bring them what it will in the future, private accounts would allow them to play a role in shaping the future for themselves and their own families.

    By Blogger BadgerZach, at 3:57 AM  

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