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 21^st century. A system that provides freedom and financial opportunity is much better than a system of welfare and government control.