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Privatization of Social Security in the US

Diskussionsbeitrag / Streitschrift 2018 6 Seiten

BWL - Wirtschaftspolitik


Privatization of social security seems to have created an unprecedented debate in the past decade. This is attributable to the conflict of ideas between the critics of moving social security into private accounts and supporters of the proposal. From an economic perspective, the proposal to move social security into private account is believed to have been suggested, in order to prevent financial shortfalls in the future as it was the case in 1980s when financial difficulties were experienced. Historically, social security was created in 1935 through the Social Security Act, which was signed by President Franklin D. Roosevelt. This was meant establish a social insurance system that would protect workers and their families from catastrophic financial losses owing to retirement, disability or death. Since its inception, the US social security program provides monthly income benefits to workers who are under the social security system. As such, it ensures that workers and their families are protected against wage loss. For instance, in 2009, 69% of social security benefits were offered to retired workers, as well as their families, whereas disabled workers and survivors of the deceased workers received 18% and 13% of social security benefits, respectively (Estes et al., 2009). Currently, most Americans rely on social security program as the main retirement plan, and this phenomenon has raised concerns on its sustainability in the future. It is projected that over forty million Americans will attain their retirement age between 2010 and 2040. This implies that the social security will become one of the greatest single expenditures of the federal budget. This is probably why proponents of the proposal for moving social security to private accounts maintain that privatization will address insolvency in the future. Despite the benefits associated with the privatization of social security, there are numerous disadvantages which will create problems to the beneficiaries of the social security program. Therefore, this paper will provide a comprehensive argument against the proposal for the privatization of social security.

In a nutshell, the idea of privatizing social security, as it was first raised by President W. Bush in 2001, seems risky and complicated (Estes et al., 2009). This is so because; most Americans rely on social security program as their retirement safety net; thus, investing retirement money in private accounts will expose workers to financial uncertainties. Therefore, it is not surprising that President Obama is opposing the proposal for moving social security into private accounts. On August 18, 2010, President Obama remarked, “I have been adamant in saying that Social Security should not be privatized, and it will not be privatized as long as I'm President” (White House, 2010). His vehement objection to the privatization of social security can be justified by a number of reasons that explain the risk involved in investing in private accounts.

First, it is apparent that privatizing social security will lead to a significant decrease of social security benefits which are currently offered by the traditional social security system. It is predicted that privatization of social security will lead to the reduction of benefit levels by 44% in the next forty-seven years (Kertzer & Schaie, 2013). This implies that private accounts will be offering workers and their families low monthly incomes which will not be adequate to sustain their living. Currently, some Americans invest in private accounts for their retirement, although the subscription to private accounts remains relatively low. From an economic perspective, low investment in private accounts can be attributable to the fact that private accounts are affected by policy changes in the respective agencies. As a result, retirement benefits are subjected to perennial changes which may cause consequences to the beneficiaries. In contrast, the current social security program remains consistent with the country’s economic and social trends, in order to prevent wage loss to the US workforce. As such, it is convenient to most workers, and this is why most Americans prefer the traditional social security from private accounts. In reality, the current social security program provides adequate retirement benefits to its beneficiaries to sustain their social and financial welfare, and this ensures that America thrives as a healthy nation.

Another disadvantage moving social security into private accounts is the high transition costs. Ideally, the proposal for privatizing social security requires the establishment of a reliable privatization system in which new private accounts will be created. This implies that the creation of new accounts will be done while providing social security benefits to the current beneficiaries. This transition is estimated to cost $2 trillion. It is apparent that any fiscal benefits associated with privatization of social security will be lifted by the upfront costs of creating individual accounts. Therefore, it is unrealistic to engage in such a costly transition from the traditional social security to private accounts when the US economy is experiencing a significant stagnation.

It is also apparent that privatizing social security will lead to a significant reduction of special insurance protections. Currently, social security program provides special insurance protections through the disability and survivor’s insurance. Therefore, privatizing social security will introduce cuts on these insurance plans, in order to generate revenue for funding private retirement accounts (Congress, 2011). In addition, privatization of social security may lead to the weakening of the federal retirement system because investing money in the stock market bears potential risks. For instance, the privatization system will expose workers to unscrupulous stock brokers through private investing accounts. As a result, privatization of social security will not bring any economic benefit to the US economy because billions of dollars will be channeled to private agencies who will be involved in the management and brokerage activities. In addition, the US government will incur enormous costs in hiring and training new public employees to serve the high population of retired workers. In practice, managing private retirement accounts will require tens of thousands of staff because the number of social security beneficiaries is expected to increase between 2010 and 2040. This is the period when the largest percentage of the post-war baby boomers will be reaching the retirement age of 65 years. Therefore, it is apparent that the number of retired workers will surge, even if demographic trends remain unchanged. This implies that the number of workers receiving social security benefits will be higher than 39 million who are currently being paid. It will also influence investment choices of many workers who do not understand how to make long-term investment decisions. Ideally, private accounts require sound decisions on long-term investments; thus, most workers will be placed at the losing end.

On the other hand, privatization of social security will introduce unwieldy and bureaucratic decentralized system. In theory, shifting retirement benefits into private accounts establishes decentralized system which requires the existence of an array of factors to operate. For instance, private accounts will be required to put into consideration millions of diverse preferences, expectations and opinions of individual investors, and this aspect cannot work without bureaucratic strategies.

It is also worth noting that privatization of social security has been found to be accompanied with management challenges. This assertion can be justified by the situation in the United Kingdom where federal retirement benefits have been reduced by 43% owing to the increase in marketing costs and management fees. Since the privatization of social security in 1988, UK has been experiencing disappointing outcomes (George, 2010). Therefore, the move to privatize social security in the US may bring devastating outcomes as it has been proven in other countries with private retirement accounts.

From an economic perspective, privatization of social security is not necessary because the current system can address future budget shortfalls. Ideally, privatization is a new plan which is intended to prevent budget shortfalls in the future. However, it is not certain whether the predicted financial crisis will occur given that economic trends are subject to change owing to the dynamic nature of the global economy. Therefore, the US government should look for alternative ways to fix future budget shortfalls within the current system, rather than adopting a new system which seems complex and costly. It is apparent that the current system can address any future shortfalls by increasing taxes, raising the retirement age and reducing benefits. This is relatively the same as what will happen under the new system of privatized accounts because retirement benefits will be reduced through management fees, whereas the cost of transition may prompt the government to increase taxes, in order to generate adequate revenue for setting the new system.

It is also worth noting that privatization of social security will disadvantage low-income workers. This is so because private accounts will require high wages, in order to take high risks which are usually involved in high-yielding investments. As such, most people who are in low paying jobs will not be able to save for their retirement. This aspect makes privatization of social security more expensive to the individual investor, as well as the nation because the low-income workers who will not be receiving retirement benefits from private accounts will increase the economic burden of the country.

Despite the disadvantages associated with the privatization of social security, it is worth acknowledging some of its benefits. It is apparent that the privatization of Social Security will improve the social security system for future generations, positively influence the economy growth, and lower current debt related to existing program.

There is an array of ways through which social security for the future generations will be improved under private accounts. It is believed that private accounts will enable workers to receive high returns. Ordinarily, competent investors in the stock market reap high amounts of money through adjusting their investment in accordance to the trends in the market. By doing so, they always ensure that high rates of returns are maintained. In addition, rises in the market leads to a significant growth of their returns. Therefore, workers under the private retirement system are expected to reap similar benefits in the market. Moreover, workers will have self-control and self-interest in their investments. In the new social security system, workers will be in charge of their money. As such, they will exercise self-control in choosing stocks or other investments. It will also be associated with an aspect of self-interest because workers will not be paying taxes to cater for other people as it is the case with the current system.



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privatization social security




Titel: Privatization of Social Security in the US